1099 Reporting Requirements for Rental Real Estate

To comply with requirements for favorable tax treatment, rental property owners will need to file Form 1099-NEC, formerly 1099- Misc, for 2020 payments made to rental property service providers.

You may want to take action now to be ready for the 2020 tax and information filings. For details on each section below, follow the links to the Kerkering Barberio website. Contact your Kerkering Barberio tax adviser at 941-365-4617 if you have additional questions.

Rental Real Estate, the Qualified Business Income (QBI) Deduction, and Forms 1099-NEC.

Due to new laws and regulations, there are additional requirements to obtain the most favorable tax treatment for rental property. 

Since the passage of the 2017 Tax Act, a rental property must rise to the level of being a trade or a business to be eligible for the tax benefit of Qualified Business Income (QBI). The QBI rules allow a deduction from taxable income of up to 20% of the net income of the rental property. Because neither the IRS Code nor Regulations define a trade or a business, the IRS has provided for two methods to help determine the rental property’s trade or business status. These methods are the Safe Harbor Method and the Alternative Facts and Circumstances Method. Although the requirements to meet trade or business status under the Safe Harbor Method are stringent and may be difficult to meet, the IRS does not specifically mention filing Form 1099-NEC. The form and function of the Alternative Facts and Circumstances Method are important to demonstrate that the rental is being operated as a trade or business. This includes filing all tax information forms, such as Form 1099-NEC.

Form 1099-NEC Filing Requirements

If a trade or business pays $600 or more a year for services, rent or royalties to any individual, partnership,LLC, or to anyone for legal services, Form 1099‐NEC must be sent to recipients and filed with the IRS by January 31 of each year. For rental properties, these common services may include: cleaning, and maintenance, commissions, professional fees, management fees, repairs, etc.  (Payments made via a credit card are reportable by the credit card company, and do not require additional reporting on Form 1099-NEC.)

To properly file Form 1099‐NEC, each service provider must provide a signed Form W‐9 to the trade or business.We suggest obtaining this Form W-9 from every service provider before making payment to that provider as it may be difficult to obtain after payment has been made. Your Kerkering Barberio tax adviser can assist you with preparing Form 1099-NEC and will need all information by January 15 to prepare the forms by the filing due date.  A blank Form W-9 is available at https://www.irs.gov/pub/irs-pdf/fw9.pdf.

There are a couple of questions on income tax returns asking if all required Form 1099-NEC were filed.  There are penalties for failure to file these forms timely. The IRS may also hold you responsible for not withholding 24% on the amount paid and disallow a deduction for the payments made.

The Safe Harbor Method for rental real estate is to be treated as a trade or business

The IRS issued guidance in 2019, which offers a safe harbor (determined annually) for rental real estate to be treated as a trade or business for purposes of the 20% QBI deduction. Although the requirements to meet the safe harbor may be difficult to follow, they do not specifically require the filing of Form 1099- NEC.  However, the following requirements must be met.

1. Separate books and records (including bank accounts) are maintained.
2. At least 250 hours of qualifying rental services are performed per year.  If the rental real estate enterprise has been in existence at least four years, and at least 250 hours of qualifying rental services were performed in any three of the last five consecutive tax years, this condition is met.
3. Contemporaneous records are maintained regarding the hours, description, and date of all services performed and who performed these services.  Contemporaneous means the records must be complete before the tax return is filed. 
4. Required disclosures are attached to a timely filed original return.

Qualifying Rental Services do count towards the 250 hour requirement. Such services may be performed by owners, employees, independent contractors, or agents, and include but are not limited to: advertising to rent the real estate; negotiating and executing leases; verifying tenant applications; collecting rent; operating, maintaining and repairing the property; managing the real estate; purchasing materials; and supervising employees or independent contractors.

Non-Qualifying Rental Services do not count towards the 250 hour requirement. Non-qualified services include: arranging financing; procuring property, reviewing financial statements or operational reports; planning, managing, or constructing long-term improvements; or hours spent traveling to and from the real estate. There are certain other limitations, as well.

The Alternative Facts and Circumstances Method for rental real estate is to be treated as a trade or business

You may not be able or willing to do everything necessary to qualify for the Safe Harbor Method. This means that rental real estate would have to qualify for trade or business status based on the Alternative Facts and Circumstances Method.  This method is difficult because of its vagueness due to the fact there is virtually no IRS guidance on what qualifies as facts and circumstances.  However, the IRS has indicated one factor they will consider. In its final regulations on the 20% QBI deduction, the IRS said, “taxpayers should consider the appropriateness of treating a rental activity as a trade or business, …where the taxpayer does not comply with the information return filing requirements.”  In other words, if you plan to claim the real estate rental as a trade or business, all required Form 1099 (information returns) should be filed. Form 1099-NEC is one of the Forms in the 1099 information group.

Recommended Steps to Take Now

• If you intend to claim the Safe Harbor Method, begin keeping separate books and contemporaneous records for all 2020 services performed, as described above.
• If you intend to use the Alternative Facts and Circumstances Method, begin obtaining signed Forms W-9 from each service provider to facilitate 2020 Form  1099-NEC reporting.

Contact your Kerkering Barberio tax adviser at 941-365-4617 if you have additional questions.