This is part 3 in our in-depth look at whether owners of rental properties need to issue 1099s.
In part 2, we closed with an opinion given by numerous CPAs, that “only” real estate professionals need to issue 1099s for their rental activity. Let’s look at where they get this from.
First of all, there was a letter written by the AICPA in 2013 to the IRS, in which the AICPA apparently said it believes “only” real estate professionals need to issue 1099s. I haven’t been able to get my hands on this letter to see what it really said, so I don’t want to put words in the AICPA’s mouth, but this is what a lot of CPAs online are referencing.
The idea of “only” real estate professionals needing to issue 1099s comes from the regulations under the net investment income tax. This is the 3.8% tax on investment income of people whose AGI is above certain thresholds.
The regulations for the NIIT are found under Section 1411. Income is generally considered subject to NIIT unless the income is from a trade or business that is not a passive activity. Fast-forward to Regulation 1.1411-4….
If we look at Regulation 1.411-4(g)(7)(i)(A) we find what the “only real estate pros need to issue 1099s” crowd is relying on. This part of the regulation says, regarding a taxpayer who meets the real estate professional tests:
“Such gross rental income from that rental activity is deemed to be derived in the ordinary course of a trade or business within the meaning of paragraph (b) of this section.”
(Note: “paragraph b” of that regulation says income from a trade or business is not subject to NIIT.)
So this is what people are hitching their wagon to when they say that only real estate pros need to issue 1099s for their rentals. This reg says rental activity of a real estate professional is not subject to NIIT because their rental activity is a trade or business. Therefore, the argument goes, all other rental activity is investment activity because it’s subject to NIIT.
The key question, then, is: do the NIIT regs change the definition of “trade or business” as it relates to rental property?
I can see the point people are making here, but my interpretation (and I’ve talked to other tax pros who agree with me) is that the NIIT regs regarding real estate pros should be read as a safe harbor of sorts, to help real estate pros avoid NIIT on their rentals. In fact, the title of that section of the regs is “Safe Harbor for Real Estate Professionals.”
But, that’s just my opinion, and many others disagree. If you’re looking for a way of saying a small landlord doesn’t need to issue 1099s, this is a creative way of finding an “out.” And in the absence of formal guidance (and there is no formal guidance!), you could certainly latch onto this.
Does your head hurt? It should because this is tough stuff!
Links to Other Parts in This Series
- Part 1 (Introduction)
- Part 2 (What is a Trade or Business?)
- Part 4 (Cautions About Relying on NIIT Regs for 1099 Purposes)
- Part 5 (Miscellaneous Discussion: What Was the ACA Really Changing; How to Proceed)
- Part 6 (Why Isn’t There a Clear Answer on This?)