Taxpayer owns a rental property. They hired a property management company to oversee the property. During the year, total rent collected was $10,000. The management company kept $2,000 for their fees and paid another $1,000 of repairs. The actual amount of money the taxpayer received from the company was the net amount of $7,000.
The management company sent the taxpayer a 1099-MISC that showed $7,000 of income in box 7 of the 1099.
Is this correct, and if not, what’s the fix?
Is It Correct?
The 1099 from the management company is wrong in two ways.
First, a 1099 from a property management company is supposed to show the GROSS collections rather than the net amount. See Treasury Regulation 1.6041-1(f)(1) as well as Example 5 under 1.6041-1(e)(5).
So the 1099-MISC should have reported the full $10,000 of rent collected. The taxpayer reports $10,000 of rental income on Schedule E, and then takes deductions for the $3,000 of expenses.
Second, rental income is reported in box 1 of the 1099-MISC, not in box 7. Box 7 is used for payments to independent contractors.
Why is This a Problem?
Since the taxpayer received a 1099 showing independent contractor pay, the IRS will be expecting the taxpayer to report that amount as self-employment income on a Schedule C and pay self-employment tax.
What’s the Fix?
The taxpayer needs to contact the management company and have them issue a corrected 1099 showing $10,000 in box 1.
Planning for the Worst-Case Scenario
What if the management company refuses to re-issue the 1099?
One time, I dealt with a similar scenario where, for reasons known only to the issuer of the 1099, they absolutely refused to issue a corrected 1099. That case was a car dealership that had issued my client a 1099 that showed the amount of a trade-in as box 7 income. The dealership refused to correct the 1099.
In that case, I created a Schedule C and showed the box 7 income as income. Then, under “other expenses” I showed a corresponding expense called “1099 issued in error” so that the Schedule C netted out to $0. (I’ll go into more about this situation in a future post.)
In the case of our rental example here, I would;
- Properly report $10,000 of rental income on Schedule E.
- Create a Schedule C showing $10,000 of gross revenue and $10,000 of expenses so it nets to $0.
- Make sure everything relating to the case is documented in case the IRS comes calling.
Again, this is what to do in the worst-case scenario of not getting a corrected 1099. Best case, the company re-issues the 1099 and no Schedule C would be necessary.
Alternate Scenario: Box 1 but with the Wrong Amount
What if the rental income was correctly reported in box 1 of the 1099, but incorrectly showed $7,000 instead of $10,000?
In that case, the truly proper thing is to get a corrected 1099, but I would probably do the following: report $10,000 of rental income (regardless of what the 1099 shows) and report $3,000 of expenses and be done with it, rather than chasing after a corrected 1099.
“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.”