Residential Rental

[pmedders]

Client has residental rental with expenses of $1700 for yard work that she did not issue 1099's to worker. What are the options - shoud this expense be claimed on the tax return even if 1099 was not issued or should client be advised that not legitimate unless 1099 has been issued. She can not issue a 1099 at this point due to not obtaining worker's SS # and worker no longer works for client.

[taxmandan]

expenses on rental

She can certainly deduct the expense, it is ordinary and necessary. You do need to caution her that the IRS will try to disallow the deduction on audit without a 1099. Just means her tax rep who is handling the audit will have to work a little harder to keep it on the return.. But that should not prevent her from deducting the expense, it's not excessively large nor out of line for a rental property to incur such a cost.

[Black Bart]

Late 1099

She can not issue a 1099 at this point due to not obtaining worker's SS # and worker no longer works for client.

Actually she can issue a 1099, even if it is late. Just type the guy's name and address and leave the number blank. If address is unknown you can use "General Delivery" for the street address. Use the name of her town. Mail it. Keep the envelope when it comes back so she will have the "Return to Sender" stamp on it which will prove she made a good faith effort to deliver it.

If the IRS catches it (they don't always-about a 50-50 chance), then they'll just bill her $50 for late filing and $50 for incomplete information. Even if they do, she can write back that the guy promised to get the number for her, but never got around to it. That excuse may not fly, but it only costs 37 cents to try. After a year or two goes by, SSA may write and ask for the SSN. She can write back and tell them he was a transient, didn't give her the number, and she doesn't have it. They'll accept that.

The fact that she was out the $1,700 clinches the expense for the tax return (assuming she can prove it), since not filing a 1099 is just that--a non-filing violation--and nothing else.

If she feels lucky, she can forget the whole thing and, if not audited, nothing will ever come of it. But, If she is audited, one of the first things they usually ask is, "Did you file your 1099s?" If the answer to that is no, then they may charge her the first hundred plus another hundred for neglect to file or (worst case), as I recall, 10% of the amount of the 1099s not made. That 10% thing may have changed--seems like somebody told me there was no maximum now. Anyhow, if I had the choice, I think I'd rather send the incomplete form, as it shows your heart's in the right place and they can't get you later for intentional disregard.

[JG EA]

1099

I have concluded (after doing a lot of research on this a while back) she does not have to issue a 1099 because rental property is not a "trade or business". Just as a homeowner does not have to issue a 1099 for work done on his own home, neither does an individual that has the investment of a residential rental.

[Black Bart]

Gee,

I have concluded (after doing a lot of research on this a while back) she does not have to issue a 1099 because rental property is not a "trade or business". Just as a homeowner does not have to issue a 1099 for work done on his own home, neither does an individual that has the investment of a residential rental.

if you'da just mentioned that a few hours earlier I could'a saved a lotta writin'.

Oh well, my method's still good for C and F.

[abby]

rentals as trade or business

I'm not sure I can agree with 'not a trade or business' conclusion. It is a trade or business that is considered passive for tax purposes. Form 4797 is used to dispose of property - for example. I know this discussion is an ongoing struggle for us all. In this case, I agree that the deduction should be taken if it is a legitimate cost, but the 1099 issue may still come up in an audit.

One could certainly hold rentals as investments and hire someone to manage them, but the managing of the rentals is an activity - a business activity, and someone has to be doing this.

The person managing the rentals should issue 1099, in my view. That could be the active participant owner (thereby earning the possible $25,000 loss allowance) or the management company.

[natiro]

Trade or business

I disagree with Abby regarding weather holding this residential rental property is a trade or business (at least as the definition applies to passive activities), per Reg, below. That said, the instructions to Form 1099-Misc says that a trade or business is an activity engaged in for profit or gain. So I'm not sure whether the IRS looks at trade or business differently for Form 1099 requirements than they do for passive activity rules. I have to admit that I don't think any of my clients with rentals have ever sent out 1099s. I guess I should think about the issue more carefully!!!


Reg § 1.469-4. Definition of activity.

(a) Scope and purpose. This section sets forth the rules for grouping a taxpayer's trade or business activities and rental activities for purposes of applying the passive activity loss and credit limitation rules of section 469. A taxpayer's activities include those conducted through C corporations that are subject to section 469, S corporations, and partnerships.

(b) Definitions. The following definitions apply for purposes of this section—

(1) Trade or business activities. Trade or business activities are activities, other than rental activities or activities that are treated under §1.469-1T(e)(3)(vi)(B) as incidental to an activity of holding property for investment, that—

(i) Involve the conduct of a trade or business (within the meaning of section 162);

(ii) Are conducted in anticipation of the commencement of a trade or business; or

(iii) Involve research or experimental expenditures that are deductible under section 174 (or would be deductible if the taxpayer adopted the method described in section 174(a)).

(2) Rental activities. Rental activities are activities that constitute rental activities within the meaning of §1.469-1T(e)(3).

[abby]

I defer

I must (and have before) defer to the definition of rental activities in the code.

The main point I make is that when I read instructions for individual forms, like Form 4797 (which disposes of business use property, and this includes property use in rentals) and for Form 1099 - they seem to require that we treat these rentals as business property - and my conclusion is that we must treat rentals as passive activities for applying the passive activity rules by code, but treat them as a business engaged in for profit on many other fronts.

I've never found the unfied theory that ties it all together - but live in hope that someone will someday find it and post it for us!

[S T]

Rental Real Estate

That is the question , when it comes to the 1099 misc or information returns, is an individual that owns and operates rental real estate (whether it be one or several) classified as a trade or business for 1099 misc rules (information returns). And is there a difference if the taxpayer is a residental rental real estate owner with only 1 or 2, as opposed to a taxpayer that is a commercial rental real estate owner?

I think so, but can not find a definitive answer.

We already know that it is a passive activity for tax purposes reported on Schedule E, but somehow I think 1099 misc forms still need to be issued to independent contractors.

I found a phone contact and an email to ask questions, so that is maybe what we should do. phone is 1-866-455-7438, and email is mccirp@irs.gov, information call site. http://www.unclefed.com/IRS-Forms/2003/p15.pdf. This might be out of date, I am not sure.

Sandy

[JG EA]

Another thought

I have the same desire to make all things tax as difficult as possible. But here's another thought as to "for gain or profit" not meaning (in all cases) a trade or business.

An owner of stocks and bonds hopes to make a gain and a profit do they not? Do they issue 1099's to their brokers, for the accountant, etc. Of course not.

Saying it would be different if they actually were in the business, a trader themselves, does not confuss the issue that this is an investment for most people. An investor does not need to issue 1099's. I think neither do holders of residential real property.