Before we go any further, let’s go back to the beginning and the whole “the ACA said landlords had to issue 1099s and then that got repealed” thing.
What was the ACA really trying to change?
The committee notes reference the fact that there was a disparity in treatment between landlords whose property rose to the level of a trade or business, versus landlords whose property was just investment activity, because those with the investment property didn’t need to issue 1099s.
Congress put that provision in the ACA (which again was later repealed) to make ALL rental owners subject to the same reporting requirements, thus leveling the playing field among rental owners as far as 1099 requirements go, and having the added benefit to the government of drawing more transactions onto 1099s, thus potentially generating more tax revenue for the government.
So it appears to me that a lot of rental owners have probably ALWAYS had a 1099 reporting obligation because they probably have a trade or business under Section 162. (Don’t panic about this, we’ll discuss how to proceed below)
The basic Section 6041 requirements that a “trade or business” issue 1099s was not repealed. What was repealed was the part of the ACA that said “all” rental owners needed to issue 1099s.
It would have been nice if, when that part of the ACA got repealed, the IRS had come out with a news release or something to explain exactly how this affected landlords. But alas, they didn’t.
Stages of Thought on This Issue
I have gone through many stages in my thoughts on this subject.
- For years, I had said landlords didn’t need to issue 1099s because “that part of the ACA got repealed.”
- Then, in one of my 1099 presentations, someone asked why Schedule E, where you report rental activity, has the question about “Were you required to issue 1099s.” I did some digging and saw all the chatter about “only real estate professionals need to issue 1099s.” I looked into this further and took some continuing ed where a reputable presenter confirmed this line of thinking, and it seemed to make sense. For awhile, I accepted this as reality and carried on.
- Then, when giving my 1099 presentation a few months ago, a participant challenged me on the whole “only real estate professional” thing, and they asked for citations. This caused me to start digging deeper. And the results of my digging caused me to change my way of thinking.
- I now believe that many rental owners probably do have a 1099 reporting requirement.
So how do we proceed?
What I am doing is talking to my rental owner clients and telling them what the issues and uncertainties are, and letting them decide what they want to do.
Filing 1099s isn’t that hard. (To be fair, getting the information from contractors to get the 1099s issued CAN be hard, but the actual act of preparing 1099s isn’t that difficult.) I am giving my rental clients — or at least the ones who are probably a trade or business — a stack of Form W-9’s and telling them to have their contractors start filling them out going forward.
And if you want to say “I’m not a real estate professional so I’m not going to file 1099s,” that’s fine but remember the consequences:
- No Section 199A QBI deduction
- No Section 1231 treatment of a loss on the sale of the property
- If the property is generating losses, and the taxpayer’s overall income is low, you could run into situations where the rental might be generating a net operating loss… but it’s only an NOL if the rental activity is a trade or business.
The only guidance we have to go on is court cases, and the part of the NIIT regs that defines “trade or business” with rentals as meaning real estate professionals. In the absence of further guidance, one can twist themselves into knots trying to figure out what to do.
In the 6th and final part, I’ll give my opinions on why the IRS hasn’t just come out and said exactly what we should be doing here.
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 4 (Cautions About Relying on NIIT Regs for 1099 Purposes)
- Part 6 (Why Isn’t There a Clear Answer on This?)