Real Estate Professionals Should Issue Forms 1099

Real Estate Professionals Should Issue Forms 1099 For Their Rental Activities

Ordinarily, rental properties are treated as passive activities by property owners. The passive activity rules limit the losses that can be taken on your personal return. Those individuals who own and actively participate in a rental estate activity may offset, under Code Section 469(i), up to $25,000 of losses. This amount is subject to phaseout when modified adjusted gross income is more than $100,000. If your rental properties are treated as passive activities then you are not subject to the Form 1099-MISC filing requirements.

Effective in 2011, there is required reporting of rental property expense payments. This requirement only applies to persons classified as "real estate professionals."

A real estate professional may be able to treat rental real estate activities as non-passive and thus not be subject to the passive activity rules described above. Code Section 469(c)(7) describes two requirements to qualify as a real estate professional for tax purposes:

More than one-half of the personal services performed in trades or businesses by the taxpayer during the tax year must involve real property trades or businesses in which the taxpayer (or taxpayer's spouse) materially participates; and
The taxpayer must perform more than 750 hours of service during the tax year in real property trades or businesses in which the taxpayer (or the taxpayer's spouse) materially participates.

If you satisfy both of these requirements and take the position (by election) on your tax return that you are a materially participating real estate professional then you are considered to be in a trade or business.

If you are a trade or business, failure to meet the IRS Form 1099 reporting requirements may cause you to incur penalties that you weren't expecting. The penalty for failure to file Form 1099 can be as much as 50% of the amount paid for services.

Therefore, if you are a materially participating real estate professional then you are required to issue Form 1099-MISC to any unincorporated independent contractor (sole proprietor, or partnership, or LLC) that provides services to you in the course of your trade or business and to whom you have paid at least $600 during the year. You are still required to issue a Form 1099-MISC for business-related payments to attorneys whether they are incorporated or unincorporated.

If you meet the 1099-MISC filing requirement, here is what you need to do:

Prepare Form 1099-MISC. This is a multi-part form.
Mail Copy B and 2 to the independent contractor no later than January 31 of the following year.
Mail Copy A along with Form 1096 to the IRS no later than February 28, or March 31 if you file electronically.
Keep Copy C for your records.

If you have any questions, do not hesitate to contact the professionals at Dana S. Beane & Company, PLLC

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