News from AVZ

February 2011

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New 1099 Reporting Requirements for Landlords

Dear Friend:

Generally, payments in the course of a "trade or business" of $600 or more to a single non-corporate recipient must be reported to the IRS (and the payee), usually on Form 1099-MISC.

Please be advised that Congress, in The Small Business Jobs Act of 2010 (2010 Jobs Act), expanded the information return reporting requirements for landlords as of 2011, by amending the definition of "trade or business" to include the rental of real property. Previously, most landlords were not subject to the reporting requirements because renting real property was not considered to be a trade or business.

However, there remain some exceptions to the new requirement for landlord's to report payments of $600 or more, such as in cases where the taxpayer receives substantially all of their rental income from the temporary rental of their primary residence, or where individuals receive "minimal" rental income (to be determined by regulations not yet issued), or where individuals' compliance with the reporting requirements would cause hardship (again, to be determined by regulations not yet issued).

Like all returns, Forms 1099 must accurately identify the payor and the payee, as well as the total amount paid. Accurate identification includes the name, address and taxpayer identification number (TIN) of the payor and payee. The deadlines for providing forms 1099 to payees is January 31 and for filing the returns with the IRS is February 28 (March 31 if electronically filed), both in the year following the year of payment.

It is the payor's obligation to request this information from the payee and Form W-9 may be used for this purpose. A landlord should request that Form W-9 be completed before making any payments to the payee because if the payee fails or refuses to provide the correct taxpayer identification number, the landlord often is required to withhold and remit backup withholding from any payments due to the payee, or be subject to penalty for failure to backup withhold. Also, a $50 penalty may be imposed on a payee who fails to provide a correct TIN upon request.

Since individual landlords have not, until now, been "engaged in a trade or business", the reporting requirements may create an identity-theft risk for them since the IRS' instructions for Form 1099 advise sole proprietors and others who are not required to have an employer identification number (EIN) to use their Social Security number (SSN) for reporting purposes. To protect disclosure of their SSN's, landlords should consider either organizing a separate company or LLC to perform management services for the property (which would be responsible for reporting any payments on Form 1099 with its own EIN) or placing the real property in a trust (and use the trust's EIN for reporting purposes), thus protecting disclosure of the landlord's SSN.