New Record Keeping Requirments for Landlords
New Record Keeping Requirements for Landlords
As if a landlord didn’t have enough to do…now this!
New legislation passed under H.R. 5297: Small Business Jobs Act of 2010 will have an impact on tax reporting for landlords and investor-owners. The “landlord provision” under Section 2101 established that “a person receiving rental income from real estate shall be considered to be engaged in a trade or business of renting property.”
IRS regulations have long required businesses to provide a Form 1099 to persons or non-corporate entities performing services for payments of $600 or more in the calendar year. Now landlords have the same Form 1099-MISC reporting requirements as other taxpayers in a trade or business. Prior to this legislation, only those real estate professionals actively engaged in rental activities such as property management were considered to be in the trade or business of renting property and required to file informational forms with the IRS.
The Instructions for Form 1099-MISC for tax year 2011 requires reporting payments of $600 or more for rental property expenses but not if an individual investor/landlord is an active member of the Armed Forces or an employee of the intelligence community as defined in section 121(d)(9)(C) and substantially all rental income is from renting a principal home on a temporary basis.
It also notes that other exceptions may be provided in the future. Such exceptions might exempt landlords whose annual rental income is not more than a minimal amount or those landlords who would experience undue hardship in complying with reporting requirements. However the IRS as of this writing has not yet issued guidance on such other exceptions/exemptions.
A separate Form 1099 will need to be filed for each payee. Payments to tax-exempt organizations are not included in this new requirement. A Form 1099 is not required for any contractor or laborer who is paid less than $600 in the tax year.
The exemption from reporting payments made to corporations for 2011 does not apply to payments for legal services. Therefore, landlords must report payment of attorneys’ fees even if the law firm is incorporated.
As stated, the goals of the new legislation are to:
- ensure that vendors and contractors are accurately reporting all taxable income to the IRS as required by law,
- hold landlords responsible for providing a Form 1099 to contractors who perform services on rental property,
- reduce the number of landlords who falsely report deductions for services that were not performed for the purpose of increasing tax write-offs, and
- verify the deductions that are claimed each year for rental property repairs and improvements.
The number of increased tax filings is expected to reduce the tax gap and result in additional revenues of 2.5 billion dollars over the next decade.
Landlords will be required to provide a Form 1099-MISC to each vendor prior to January 31, 2012 and file IRS and state forms by February 28, 2012. In preparation for the reporting requirement, landlords are advised to review their current bookkeeping practices to ensure that the necessary information is being collected to prepare and file accurate information forms. For some “Mom and Pop” landlords this may mean additional time must be allocated to maintain more detailed records for tracking vendor/contractor information and payments. For those landlords who use an accountant, be sure that you know what your accountant expects you to do regarding documentation.
It will be necessary to gather federal tax identification numbers or Social Security numbers, legal names, and addresses of contractors/vendors that provide services for rental repairs and improvements in order to properly file the Form 1099. The best practice would be to require all service providers to complete a Form W-9 (Request for Taxpayer Identification Number and Certification) prior to work being performed and receiving payment for services. Even if the landlord does not expect to pay the service provider more than $600 total for work done during the year, it is still a good idea to have such a procedure in case of unforeseen future repairs and payments that would exceed the threshold amount.
The Form W-9 is not filed with the IRS but kept by the landlord in his files as support for the tax identification number, address, and name reported on the information form. Tax identification numbers are checked against existing IRS databases to detect fraudulent numbers. Landlords should note that if the W-9 is improperly filled out or false information supplied, the IRS will notify the landlord of any errors and may require backup withholding on payments. In effect, the landlord will be assumed to be the statutory employer of that contractor and responsible for all applicable tax withholdings.
In addition landlords should have a record keeping system to track all payments to specific vendors and contractors made through out the year. Service providers commonly used by landlords include painters, electricians, plumbers, exterminators, landscapers, pool maintenance companies, security firms, other repair/maintenance contractors, or any other business entity which provides a service such as accounting or bookkeeping.
The IRS can impose monetary penalties on landlords who fail to comply with the reporting requirements. The new rules carry an enhanced penalty structure for intentional failure to file the required forms or for late filing. These penalties apply per Form 1099 that is required to be issued. The maximum penalties that can be imposed per year have also increased.
Landlords also may risk repair deductions being disallowed if they are related to payment to service providers and a Form 1099 was not properly submitted.
On a more positive note – while doing more paperwork for the IRS may seem burdensome, in effect it forces landlords to maintain better records, which in itself is a good thing. Full, adequate documentation allows landlords paper protection to claim all legitimate deductions and substantiate their allowance in the event of an audit. Besides, the rules will change again for the 2012 tax year – when Form 1099s must be issued for goods as well as services and when Form 1099s must also be issued for all corporate payees – and now is the time to set procedures in place.
There are other subtleties related to the new law and some issues are yet fully clarified, so landlords need to educate themselves by reading “2011 Instructions for Form 1099” and possible future revisions to these instructions.
Additional Information
For additional discussions regarding a wide variety of real estate investing and management issues see our other eCourses and our Mini Training Guides.