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
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:
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:
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