property manager?

[Possi]

Hey,
I'm doing my extensions now, and I have a new client (number 315! woo-hoo!).

I have never seen a business like this before and thought it best to get some input or opinion on this.

He is a property manager, aside from 2 rental properties he owns. Does this qualify him as a "real estate professional?"

I have a 1099 misc with Box 7 nonemployee compensation of almost 200k issued to my client.

Then I have numerous 1099 misc's issued from my client's business to individuals, with totals in the Box 1 Rents, paid by my client to these property owners. This year, the total rents paid out is about 236,800.

He said 1099 #1 (200k) is his money in, and the individual rents (236,800) are his money out.

There is one 1099misc for 4000.00 in box 7 nonemployee expenses also issued from my client to someone who worked for him.

I don't know why I feel this is a suspicious return, I just have a bad feeling and need some reassurance. Has anyone ever seen this before?

Where do I put these rents paid out? It will be one huge amount and I need to be sure it's in the right place.

Where do I put the nonemployee expense? COGS - labor expense?

Maybe I'm making something big out of nothing, but the man has no other expenses except for these rents paid out. It's just suspicious to me....

help?

~possi

[abby]

question

Who issued the 1099 to him?

The property manager often has to issue 1099-MISC for rents collected to the owners of the property they manage - this is NOT the property managers' expense, but the reporting requirement falls on them.

But who does he work for that he would get a 1099-MISC non-employee compensation issued to him?

I agree that something isn't quite right with this scenario.

He could well be a real estate professional - if he meets the requirement for time spent in real estate trades and then meets the material participation rules for each activity that he would wish to treat under this rule - like his own rentals.

[Possi]

another realty company

Another realty company issued the 1099misc (200,000) to him.

Then he, in turn, issues the multiple 1099misc's to others. He said it is a loss this year because the company paying him didn't get the last payments in on time.

I swear, if I was a paranoid kind of person, I'd swear it was money laundering! hahaha

I've just never seen this before and am afraid of putting the expense of the 1099's in the wrong place.

Have you ever?

btw, all of his time is in managing properties. It is his only income. So is THAT a real estate professional? (As opposed to realtor or managing his own properties?) I'd say yes.

thanks, Abby!

[abby]

the easy part

yes, I agree he sounds like he'd meet the requirements as a real estate professional - the only caution I have on that one is that he still has to meet the material participation rules on his rentals - sounds like he probably will if he is managing them himself.

The 1099 - I have not seen a property manager taking the rents he is collecting for others as an expense - but it sounds like maybe they are being passed to him as income - something is screwy there. Really screwy. I've done a good deal of bookkeeping and tax work for property managers in my day and this just sounds wrong.

I would get a detailed narrative of who is working for who, and in what capacity and what is the nature of the income on the 1099 and exactly the nature of the rents he wishes to deduct. It is possible that the reporting is just messy and he's trying to reconcile it correctly, but it also might be a bad situation.

For a new client, I applaud your caution and would not accept irregular reporting without an extremely clear and reasonable narrative.

[AZ-Tax]

Abby, on a similiar real estate manager topic...

A taxpayer is considering purchasing a rental property and hiring his daughter to manage it thus paying her. Does the IRS have any conflict with that relationship opposed to hiring a non related management company?

[abby]

my impressions

I'm thinking that if the owner is taking the management fee as a deduction the related party relationship could be examined as to a true business relationship - as to the work being done, that the work is performed in a business like manner and accurate a complete records are kept - and then that the compensation is in line with the work performed. This is one of those circumstances where a fee outside the FMV for such services could be questioned if it was too high.

I have seen a similar family relationship in a father having a son manage some of his rentals, and we gave him counsel per above - but the son was truly working full time at the thing and performing as a handyman, too. It was never tested in audit, but I'm not aware of any prohibition except the caution not to disguise a gift or support as a business expense.

Hope that helps!

[Possi]

Thanks Abby

yes, I agree he sounds like he'd meet the requirements as a real estate professional - the only caution I have on that one is that he still has to meet the material participation rules on his rentals - sounds like he probably will if he is managing them himself.

The 1099 - I have not seen a property manager taking the rents he is collecting for others as an expense - but it sounds like maybe they are being passed to him as income - something is screwy there. Really screwy. I've done a good deal of bookkeeping and tax work for property managers in my day and this just sounds wrong.

I would get a detailed narrative of who is working for who, and in what capacity and what is the nature of the income on the 1099 and exactly the nature of the rents he wishes to deduct. It is possible that the reporting is just messy and he's trying to reconcile it correctly, but it also might be a bad situation.

For a new client, I applaud your caution and would not accept irregular reporting without an extremely clear and reasonable narrative.

I will be sure the picture is clear. I suppose I will detail the expense on page 2 of the Sch C.

[taxxcpa]

Real estate professional

A real estate professional can also use Schedule E and take losses even if their income is above the threshhold for the up-to-$25000 deduction.

[Possi]

that's why I asked...

...for future years....

This year, however, I think a NOL will be in the works.

[DaveO]

Real Estate Professional

Recently I was talking with an IRS auditor on another topic and asked him how much he knew about the RE Pro classification. He remarked that he was an expert in that area and had audited and trained auditors.

I asked him beyond the material participation what was required. He said they must have a Real Estate Brokers license. I can't give you a cite but do recall an earlier thread here regarding an audit of a RE Pro that this was mentioned in.

[abby]

from TTB 7-13

"Real Property trades or businesses include development, construction, acquisition, conversion, rental, operation or management, or brokerage of real property."

I believe the prior thread discussed whether a real estate agent would qualify if they did not have a broker's license.

It would be unusual, but granted not unheard of, for those in the other trades mentioned to have a brokerage license.