Tax rules put burden on landlords

As if declining housing prices, tenant job instability and the occasional hailstorm weren't enough, landlords now have something new to worry about: increased federal tax-reporting rules.

Suppose you own a rental home and hire a plumber, painter or landscaping company to work on it. You might need to collect the Social Security number, Employer Identification Number or Taxpayer Identification Number for each contractor so you can issue them 1099-MISC forms early next year.

If you neglect this new obligation, you could face penalties and possibly disallowed deductions, tax experts say.


The new 1099-reporting rules for rental-property owners, which took effect Jan. 1, now apply when you pay $600 or more to any contractor in a calendar year. They also could include payments made to other types of entities, such as utilities for water or power service.

"The rental provisions specifically apply to individuals, who aren't used to collecting this type of information," said Mark Luscombe, principal federal tax analyst at CCH Inc. in suburban Chicago.

Barry C. Melancon, president and CEO of the American Institute of CPAs, said the new reporting requirements place paperwork burdens on many businesses, including mom-and-pop operations.

"It's not something you'd do in the normal course of business," said Melancon, who visited metro Phoenix last week. "The vast majority of people aren't aware of it."

The reporting requirements also could apply to people who own a vacation home and rent it out for just part of the year.

In addition, landlords would be required to issue 1099s in January - weeks before most people get serious about filing their own income-tax returns. If some neglected to mail the forms promptly, that could trigger a ripple effect of delays.

Although the new rules have been in effect barely a month, there are efforts to repeal some provisions, Melancon said.

Even President Barack Obama seemed to criticize them when, in his recent State of the Union address, he cited "a flaw . . . that has placed an unnecessary bookkeeping burden on small business."

Yet the president played a big role in turning that flaw into law.

The rental-property rules stem from the Small Business Jobs Act of 2010, which Obama signed.

Obama also backed the Patient Protection and Affordable Care Act, which requires businesses buying $600 or more in goods or services from other companies to supply 1099s to those entities and the IRS.

The Senate has been moving toward repealing some business-reporting rules but not the one geared to landlords.

"If there was serious support for repealing that one, I would assume it would have been taken up at the same time," Luscombe said.

At this stage, landlords probably should assume and act as if the rules will be around for a while, suggests Elizabeth Hale, a CPA at eeCPA PLC in Phoenix.

That means requesting Social Security, Taxpayer or Employer Identification numbers now, before you hire vendors for single jobs or ongoing work totaling $600 or more.

"Once you pay someone, it's harder to get that information," said Hale, who recently discussed the issue at a meeting of the Independent Rental Owners Council, a group of Arizona landlords.

The rules also raise identity-theft worries for vendors "because you're giving out your Social Security and Employer Identification numbers all over the place," Hale said.

Landlords who employ a property manager should find out if the company is collecting the required numbers and issuing 1099s for work done on their rental units.

Hale also cited another hassle looming for rental-property owners: the need to collect information and issue 1099s every time you buy an appliance, air-conditioning unit or other tangible goods worth $600 or more for a rental unit - part of the business-to-business law cited above. If not repealed, that requirement is set to take effect on purchases starting in January 2012.

There's currently an exemption for collecting information and issuing 1099s if you buy $600 or more worth of items from corporations. But starting in 2012, that exemption ends.

These and other tighter 1099-reporting rules aim to close the "tax gap" - the difference between what taxpayers truly owe and actually pay. The IRS believes many vendors have not been reporting their full income. But the rules come at a cost of increased hassles.

"They want you to have a 1099 now for everything," Hale said. "It's like Big Brother is at work."

by Russ Wiles The Arizona Republic Feb. 6, 2011 12:00 AM




Tax rules put burden on landlords