Do you rent out real estate in Arizona? Are you a landlord with tenants in a former or second home in the Phoenix metropolitan area? If so, the government has imposed a new, controversial and burdensome tax requirement that will increase your record keeping duties next year.
Starting in 2011, the new rule requires that all landlords who receive $600 or more in rent during the year must send a 1099 Form to all service providers that the landlord paid $600 or more during the year. This includes the regular type of contractors landlords retain such as plumbers, carpenters, yard services, and repair people. The 1099 must be provided to both the IRS and to the service provider
The new requirement applies to owners of both residential and commercial property. Prior to 2011, this requirement had only applied to those involved in full-time property management and those whose primary business is property management, but now the requirement covers all types of landlords. Thus, “mom and pop” investors and those who invest in real estate for their personal portfolios are subject to the new reporting requirement.
Landlords will need to gather federal tax ID numbers from service providers in order to file the 1099s. Failure to file the 1099s with the IRS can result in fines of $50 per 1099 not filed with the IRS.
Only aggregate annual payments of $600 or more for services must be reported, so the purchase of goods is not included within the reporting requirement. But there is only a temporary reprieve from the same 1099 requirements with respect to providers of good to landlords (see below).
Why are these requirements necessary? Congress adopted the provision to help “pay for” provisions in a small business bill (HR 5297), including bonus depreciation and expensing for leasehold improvements (in lieu of eliminating those deductions). The rule is intended to “encourage” contractors who have received payments from landlords to actually report that income through a section 1099. As a result, it should increase the amount of taxes paid to the treasury.
The National Association of Realtors opposed extending the 1099 reporting rules to small landlords, because is burdensome and is a trap for the “little guy”, but without success. NAR is also opposing the proposal to eliminate the home mortgage deduction, which is being considered as a debt reduction measure. To help in this effort, go to http://www.realtoractioncenter.com/realtor-party/click-to-call-mid-senate.html.
There is more! To help pay for Obamacare (the Health Care Reform legislation enacted earlier this year) a new reporting requirement that goes into effect in 2012. This provision expands the 1099 information reporting requirement to the providers of goods – which are exempt for 1099 reporting next year. I expect that some landlords may start providing 1099s to goods providers (nothing in the law says you can’t voluntarily report) to ensure they will be in compliance “from the get go” in January of 2012 when the requirement is mandatory.
– N. Mark Kramoltz © 2015