Discussion:1099 Rental What Box to Check on Tax Return Regarding 1099

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Discussion Forum Index --> Advanced Tax Questions --> 1099 Rental What Box to Check on Tax Return Regarding 1099


Discussion Forum Index --> Tax Questions --> 1099 Rental What Box to Check on Tax Return Regarding 1099

SFTax (talk|edits) said:

7 February 2012
Hello:

How is everyone treating the box to check on schedule E regarding the 1099s. My understanding is that this was repealed if not a trade or business and therefore no 1099 to issue, but question still on schedule E.

Thanks

Trillium (talk|edits) said:

7 February 2012
Prior discussions on the new questions on schedule E: Discussion:Argument over 1099s for landlords--repeal, etc...., Discussion:A whole new headache - comments on the new Sched E.

This discussion from this morning, on the parallel Qs on Sch C, links to some of the other discussions on the topic in general: Discussion:Schedule C 1099 Questions on '11 Returns.

SFTax (talk|edits) said:

7 February 2012
I took a look at the above threads and they don't seem to be on point regarding checking which box - if just a rental and not a trade or business what box to check since no 1099s required?

CrowCPA (talk|edits) said:

7 February 2012
I think that since the law was replealed, the landlord is not requied to send 1099s. Accordingly, checking the NO box is appropriate.

JAD (talk|edits) said:

7 February 2012
At some point, does a rental activity rise to the level of a trade/business under these rules? For example, if the individual has several commercial rentals? At that point, is 1099 filing required?

What if the landlord takes a separate fee for managing the rentals? He's definitely in a trade/business (the management business). Does that classification extend to the Sch E expense, causing a 1099 filing requirement?

TTMM (talk|edits) said:

7 February 2012
The law was repealed that rental activities are not automatically a trade or business for purposes of issuing a 1099-MISC.

That being said, an individual could still have a trade or business that reports its activities on schedule E. As JAD points out an individual could have several rentals that could rise to the level of being a trade.

Its a facts and circumstances situation.

Harry Boscoe (talk|edits) said:

8 February 2012
Yes, it's a facts and circumstances situation, but where's the rule that we apply to the "facts and circumstances"? And what "facts and circumstances" are we supposed to be looking at? Oh, yeah, why dontcha jump on me about ending a sentence with a preposition just when I'm getting warmed up!?!

Do the rentals become a trade or business when there are more that five properties? ...more than six? ...ten or more? Do the rentals become a trade or business when the owner spends more than 100 hours of "material participation" on each property during the year? Does a rental become a trade or business when the average rental period is seven days or less? Does a house become a trade or business when the owner changes the sheets every day and puts a chocolate bon-bon on each pillow at night? Is a "real estate professional" (see the Code) in the business of renting houses?

C'mon, IRS, give us something to dig our fangs into! Again with the preposition at the end of a sentence...

Where are these rules, and who's responsible for *not* making them more .. uh .. available? Why, if I were just a *tad* bit more cynical, I might suggest that there's a **conspiracy** within our government - a conspiracy that has decided to suppress the definition of a trade or business - if there is such a definition at all - and keep the taxpayers and their preparers in the dark. So they can use us as punching bags under audit maybe.

I'm tired of guessing! And aren't you too!?! Well, I'm putting a memo to self in my cell phone calendar for April the 19th to pick this topic up again and to study this perplexing question in more depth. Let's talk then.

[Wasn't it the law that rentals *are* (rather than "are not") automatically a trade or business for 1099 requirements that was repealed? Just quibbling...]

Podolin (talk|edits) said:

8 February 2012
Harry Boscoe - why not April 18?

Harry Boscoe (talk|edits) said:

8 February 2012
April 18th is a religious holiday fer cryin' out loud.

Ricky (talk|edits) said:

8 February 2012
Good post, Harry.

IMO, in response to Congress' repeal of the two 1099 laws last April, we now have these questions on forms that can be used to hang us with....

(prepositional phrase intended.......LOL)

I think eventually these questions will be taken off....sometime after a change in administration (in the future).

Marcilio (talk|edits) said:

8 February 2012
I don't think the 1099 questions will be removed. It's something like the questions regarding personal use of the car. Everybody checks the box that says the evidence is written, even if it's only written in their minds.

People much smarter than me have recommended never answering those types of questions "under penalty of perjury" if they can be used against you in court. Problem with the 1099 questions, is that my software doesn't give me the option of leaving the answer blank.

JAD (talk|edits) said:

8 February 2012
I suppose that we could answer the question "no", 1099s were not required. Because its a rental and that rule was repealed. Let the auditor say it's a trade/business, and then fight to the death. Fight for a plain reading of the law. That ties in with Harry's post where they use us as punching bags in an audit.

DaveFogel (talk|edits) said:

8 February 2012
Whether a rental is a trade or business is an issue that I explored in some detail in my article “Tax Aspects of Rental Property Foreclosures and ‘Short Sales’”. It's a facts and circumstances issue. Even a single rental property may constitute a business.

JAD (talk|edits) said:

8 February 2012
Wow Dave, thanks. That's really helpful to have the issue and authority summarized in a couple of paragraphs.

Taxea (talk|edits) said:

8 February 2012
Harry this came in my emails this morning...It, at least, addresses the when is it a business question

Rental Real Estate Rules and Real Estate Professionals

From: http://www.accountantsworld.com/newsletter/dailynews/redirectToLink?category=articles&title=Rental Real Estate Rules and Real Estate Professionals

My take on this situation is: A rental is not considered a business so no 1099's need to be issued unless the owner provides other services..then it is a business and 1099's are required.

Spell Czech (talk|edits) said:

8 February 2012
Marcilio says "Everybody checks the box that says the [auto business usage] evidence is written, even if it's only written in their minds." Well, no, I beg to differ, not *everybody* does that. I have *never* checked that box "yes" until *after* I had written down how many business miles there were.

On second thought, I guess I'm agreeing with you, but separating myself from your "even if" qualifier.

DaveFogel (talk|edits) said:

8 February 2012
"A rental is not considered a business so no 1099's need to be issued unless the owner provides other services..then it is a business and 1099's are required."

I don't agree. If the owner doesn't provide any services but is entitled to the $25,000 loss for rentals provided by Sec. 469(i), and if the owner has no other income, then are you taking the position that the $25,000 loss DOESN'T create an NOL because it's not a business loss? Not likely.

With the penalties at $100 for failure to file and $100 for failure to furnish, it's not hard to accumulate 1099 penalties over $1,000. With that much money at risk, I'd rather pay $3.49 to one of the IRS-specified e-filers of information returns to file/issue each 1099.

Harry Boscoe (talk|edits) said:

8 February 2012
Taxea: My link to your article isn't working; can you check it out?

Dave: Who are you working for, the IRS, or maybe you own a 1099 company? JUST KIDDING, OKAY?

Harry Boscoe (talk|edits) said:

10 February 2012
Taxea: Is this the article that you had linked to?

MarkSC (talk|edits) said:

10 February 2012
If you are using a Schedule E rather than Schedule C, you have already made the decision that the property is not a trade or business, so move on and check "no" for the 1099 box. Likewise for a partnership or corporation, if you are using an 8825 rather than page 1, it is not a trade or business. Put yourself in IRS's shoes. How likely is it that you would argue that a rental property is a trade or business? Since 99% of rental properties operate at a loss, why would you want to argue that Schedule C should be used rather than Schedule E?

Spell Czech (talk|edits) said:

10 February 2012
"If you are using a Schedule E rather than Schedule C, you have already made the decision that the property is not a trade or business, so move on and check "no" for the 1099 box."

Excellent. Practical and hard to refute!

[Not that we should be even *thinking* about the Forms and the Instructions, of course...]

DaveFogel (talk|edits) said:

10 February 2012
"If you are using a Schedule E rather than Schedule C, you have already made the decision that the property is not a trade or business, so move on and check "no" for the 1099 box."

I disagree, for the reasons stated in my 8 Feb. post above.

MarkSC (talk|edits) said:

10 February 2012
Then you disagree with the IRS. See the instructions to Schedule E and 8825.

Spell Czech (talk|edits) said:

10 February 2012
And I was thinking of adding that Schedule C is for SE taxable activities while Schedule E may or may not be. Is the scope here limited to those activities shown on page 1 of the Schedule E?

Spell Czech (talk|edits) said:

10 February 2012
But then a faint old memory comes back, reminding me that I once used the Form 1045 instructions to show a naysayer that rental losses were considered business losses in computing an NOL without any consideration of whether or not they might be "trade or business" rentals... [Not that we should be even *thinking* about the Forms and the Instructions, of course...]

DaveFogel (talk|edits) said:

10 February 2012
"Then you disagree with the IRS. See the instructions to Schedule E and 8825."

No I don’t. Please show me where the instructions to these forms differ from what I've said above.

JAD (talk|edits) said:

10 February 2012
I agree with Dave. This is not a new issue. Dave's article summarizes various authoritative sources that illustrate the complexity of this issue. I haven't read the cited sources, but I'm going to assume that he didn't publish an article with made up cites and that his analysis of the sources as presented in the article is reasonable. Form instructions are not authoritative.

I've explained the issue to my clients. We can check the box "no" under the thought that the Sch E activities are not t/b. An overzealous auditor can take another position. I've recommended filing the 1099s to avoid the issue.

Harry Boscoe (talk|edits) said:

11 February 2012
It's pretty clear there are two very different threads totally entwined here. The one is re what to do about the boxes on this year's forms, and the other is re the ephemeral evanescent evaporating ethereal perhaps-not-even-existent definition of the term "trade or business."

Re the boxes on this year's tax forms: In the vanilla case, one or two rental properties owned and managed a little bit by one or even a few taxpayers, you take the position that (1) you know what **isn't** a "trade or business" and that (2) your client has something that **isn't** a trade or business, and you check the box "no" confident that your client/landlord has escaped the burden of doing 1099s, once more. And you drag your client through the whole thing, to impress him how much research you did *just for him*.

In a different case, let's say your client operates a hotel/motel where services for the renters rise to the level of chocolate bonbons on the pillow every night. Of course you have been preparing 1099s in all prior years, and you've already prepared them for 2011, because this activity is, was, and has probably always been a trade or business...

At points in between those simple cases, maybe a quick memo to the file to support your conclusion - whichever way it needs to go - will serve you and your client well. Think about it and share your dilemma with your client. And record the answer.

Preparing the 1099s when they're not required seems slimy and money-grubbing. It's late at night and I may not be as cordial as I should be for which I apologize. And who are you working for, IRS? JUST KIDDING, OKAY?

Death&Taxes (talk|edits) said:

11 February 2012
I wonder if this penalty will ever be litigated. Client's 2 or 3 residential rentals, single family houses, are audited. For each service, client produced a bill and proof of payment. Some of the bills are from corporations, but some are from individuals. He has proved reason for the payment, and he has proved the payment was made. As I saw in the McLaughlin case, the Court accepted same in a similar situation (but payments were made in cash), so the idea that the Service can throw out the expense is illogical. Will the Service want to go to Court concerning the failure to file 1099s issue? This could mean a decision on whether two residential rentals are a trade or business for purpose of this penalty. Is this a good application of the Service's resources? Just wondering, you know. Perhaps it is in the interest of the Service to keep the mystery, and collect said penalty from those who don't want to go to Court.

Ckenefick (talk|edits) said:

11 February 2012
No, it's a terrible use of resources. Taxpayer would say that the GAO report recognizes that there's a lot of confusion in this area. Taxpayer would also say that landlords had to issue 1099's, but the law was repealed. Taxpayer would say that this is an asset just like a stock, to produce income. And taxpayer would say that if it's so important, go audit the recipient of the payment(s). Taxpayer would then hypnotize the agent with a reading of the 469 regulations and then send him on his way.

Harry Boscoe (talk|edits) said:

11 February 2012
"This could mean a decision on whether two residential rentals are a trade or business for purpose of this penalty. ... Perhaps it is in the interest of the Service to keep the mystery."

OMG!! Long live the conspiracy!

JAD (talk|edits) said:

11 February 2012
It takes about 10 seconds to do a 1099. It is not money-grubbing to just do it to avoid the issue.

Ckenefick (talk|edits) said:

11 February 2012
10 seconds???

JAD (talk|edits) said:

11 February 2012
Ok, 5 minutes if I hand write it very slowly. 2 minutes if I pay the $20 to file it electronically through paycycle.

Spell Czech (talk|edits) said:

11 February 2012
Maybe someday, a company like Marriott or Hilton will find itself in court, in a dispute over, let's say employee vs. independent contractor for the housekeeping staff and will be trapped into taking the position that it didn't prepare 1099s for the maid service personnel because they, Marriott, are no more than a "rental" activity, or so they say, and *not* a trade or business, or so they say. I'm not saying this in all seriousness, nor am I saying it totally facetiously. There may come a day when the difference between "rental" and "trade or business" makes this a really big $$ issue and we won't have a definition, then, either....

But it shouldn't be an issue at all for rental activities that aren't businesses... Let's poke Congress and IRS in the eye on this one. It's really a big stupid silly hoohah about the rental property handyman who isn't filing a tax return anyway. And creating a *how-many-billion-dollar* tax gap?

Okay, I'm a little bit on both sides of this issue...!!

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