Let’s recap what the issues are when determining if a rental owner needs to issue 1099s.
- Section 6041 deals with issuing 1099s. Section 6041 and the related regulations simply say “trades or businesses” need to issue 1099s. No definition of “trade or business” is given.
- Trade or business status with rentals has typically referred to Section 162. Many rentals could clear this hurdle and there are 75+ years of court cases which confirm this. Even 1 rental house can be a trade or business.
- But the Net Investment Income Tax regs reference the real estate professional tests under Section 469 for determining if a rental activity is a trade or business. Does this change the definition of trade or business as it relates to rentals?
- With the new Section 199A deduction for “qualified business income,” the regulations there simply say rental income qualifies for the QBI deduction if it is from a “trade or business,” with no additional definition provided. There is no reference to real estate professional in these regs.
Look Before You Leap
There is at least one big caveat to consider before jumping on board the NIIT regulations regarding rental property.
If you say “only” real estate professionals have a trade or business, you are saying ALL other rental owners are involved in investment activity instead.
Does that make sense? Especially if you have someone who owns multiple properties and actively manages them, but they don’t meet the tests to be a real estate professional?
For example, I have a client who owns 7 properties. He works at those properties at least 1 full day each week. He does most of the repairs and maintenance on the properties himself. He works a day job in a field unrelated to real estate, therefore he’ll never meet the definition of a real estate professional. But isn’t it crazy to say his rental activity isn’t a trade or business? Especially when we have 75+ years of court cases to back this up?
Consider this: if you say only real estate pros are in a trade or business, then wouldn’t it be true that if a landlord has a loss on the sale of a rental property, they would NOT be able to take a Section 1231 loss deduction (where the loss would be deductible in full as an ordinary loss)? Instead it would have to be a capital loss, subject to the $3,000 per year loss limitation.
This interpretation doesn’t make sense, especially when paired with decades of court cases.
A good overview of the issue from a different voice can be found here, from Iowa State University’s Center for Agricultural Law and Taxation. That ISU article doesn’t talk about 1099s, and it gives examples from a farm rental perspective, but you can see from the fact patterns of the examples how one could apply those examples to other types of rental activities such as a rental house.
In Part 5 we will talk about what the ACA was really trying to change and whether the repeal of the “landlord 1099” part of the ACA was really a “victory for landlords everywhere.”
Links to Other Parts in This Series
- Part 1 (Introduction)
- Part 2 (What is a Trade or Business?)
- Part 3 (Net Investment Income Tax Regs)
- Part 5 (Miscellaneous Discussion: What Was the ACA Really Changing; How to Proceed)
- Part 6 (Why Isn’t There a Clear Answer on This?)
“This blog post, along with comments that may follow, should not be considered tax advice. Before you make final tax or financial decisions, please secure a professional tax advisor to give you advice about your unique situation. To secure Jason as your accountant, please click on the ‘Services’ link at the top of the page.”