1099-MISC for Rental has amount in Box 3

[rainier_beer]

Hi All-

Received a 1099-MISC from the property management company for my rental, and instead of prior years where all income was reported in Box 1 (rent and utility income) they split out the utility income into Box 3. The utility income is reimbursement for utilities I pay on behalf of the tenant.

I contacted the property management company about this, and they say that this is correct, "per the new form".

TurboTax 2020 doesn't seem to like this when I enter a box 3 amount  for the 1099-MISC in the Rental Properties section. It warns "You can't report other income on a rental property. You can report this income later on another form or schedule later in the Interview"

So I forged through the Interview, merrily entering all my tax info and when I get to the smart check it flags the Box 3 income from the rental 1099-MISC, it instructs to associate the Box 3 amount with the proper tax form, and shows a generated 1099-MISC with several options to choose from (Schedule C/F Form 4835, Winnings, Tribal Member, Other Income…) So I stubbornly select “Other Income” again and then Smart Check completes and says “Congratulations…found no errors”

I’m unsure what the difference is, between the initial entering of Box 3 during the Interview for Business Income, and re-confirming it during the Smart Check.

Is this the proper way to go about entering this income? I've seen some similar question with answers like entering two 1099-MISC forms for each Box amount, but won't that confuse the IRS when they only see one 1099-MISC form from the property management company?

[AnnetteB6]

If you are claiming a rental expense for the utilities that you pay on behalf of the tenant, then the income reported to you in box 3 of Form 1099-MISC needs to be entered as income for your rental property.  

Based on the situation you described, the box 3 income is most likely being reported on your Form 1040 Schedule 1 Line 8 rather than being associated with your rental property.  

Entering the Form 1099-MISC into your tax return is just a means to get the income reported in the right place.  You can either leave the box 3 information blank when you enter the form into your return and then include that amount as rent not reported on Form 1099-MISC, or add the box 1 and box 3 amounts together and enter the total as rent not reported on Form 1099-MISC.  For the second choice, do not enter the Form 1099-MISC at all, just report the total amount as rental income.  The IRS is more concerned that all of your income be reported versus having it entered on Form 1099-MISC.  

If there is ever a question regarding your income, you will still have your Form 1099-MISC showing both amounts and that they were reported in total on your return.  

[Carl]

they split out the utility income into Box 3. The utility income is reimbursement for utilities I pay on behalf of the tenant.

Bottom line... the management company is flat out wrong. Period. End of Story. All monies received by a rental property owner that relates the rental *for any reason* is rental income. In many cases this would even include a property insurance payout.

I’m unsure what the difference is, between the initial entering of Box 3

Box 3 of the 1099-MISC is for *EARNED* income. In order to have earned income, you (or someone you hire to do it on your behalf) has to go out and actually *do* something to earn it. You did absolutely nothing what-so-ever to "earn" it, nor did you pay anyone to do anything for you to earn it. In addition to the money in box 3 being taxable income, it's also subject to the *additional* 15.3% self-employment tax.

Rental income is reported in box 1. You don't lift a finger to "earn" it. All you do is "sit there" and collect it each pay period. While rental income is subject to "normal" taxes, it is not subject to (and should not be) the additional 15.3% self-employment tax.

they say that this is correct, "per the new form".

What "new" form? There's nothing new about the 2020 form 1099-MISC. In fact, it's "exactly" the same as the 2019 form 1099-MISC. So ask them what "new" form they are referring to. If they start talking about the 1099-NEC (which *is* a new form) that NEC is only for "earned" income and is not used for reporting rental or any other passive type of income.  Therefore it flat out does not apply to this situation, since they did not have any need or reason to report anything to you on the 1099-NEC. (They're just trying to make you go away.)

If anything, use my four favorite words.... *show* *me* *in* *writing* where it says box 3 is correct, and show it to me on an official document on the irs.gov website. (Just because the cornell.edu website says it's correct, means nothing. Cornell University is "NOT" a taxing authority and they don't pass, write or make tax law at any level of government.

Basically, report it all as rental income. But make sure you keep all of your paperwork and correspondence on this. If (when) the IRS questions you on this a few years down the road (if you get pulled for a random audit) there's no way you're going to remember all the details from 2-3 years prior. So documentation will be your life saver, and your property manager's nightmare.

[tagteam]

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@Carl wrote:

Box 3 of the 1099-MISC is for *EARNED* income.

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That statement is wrong; Box 3 on a 1099-MISC is not necessarily for earned income (the instructions for Box 3 are reproduced below) but can encompass other types of income.

The amount shown may be payments received as the beneficiary of a deceased employee, prizes, awards, taxable damages, Indian gaming profits, or other taxable income. See Pub. 525. If it is trade or business income, report this amount on Schedule C or F (Form 1040).

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@Carl wrote:

Just because the cornell.edu website says it's correct, means nothing. Cornell University is "NOT" a taxing authority and they don't pass, write or make tax law at any level of government.

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There is a basic miscomprehension here as well; with respect to Title 26, cites to the Cornell University web site (www.law.cornell.edu) are cites to the tax code (or Regs) and mean everything. Cornell provides a repository for the code and regs.

[Carl]

If it is trade or business income, report this amount on Schedule C or F (Form 1040).

This is SCH E income. But your point is taken and acknowledged. 🙂

As for Cornell, on more than one occasion I've come across citations to tax laws that do not apply to whatever the current tax year was that was being researched.  They were valid in the past, but not the present because of tax law change. I suspect they leave them there for posterity. But if one is not extremely careful, it's very easy to mess up and think a law, rule, or regulation applies to the tax year being filed.

I can't recall when, but I had one time where I questioned something on the Cornell website. While I never got a response, about a week later I noted that the information I was questioning, was either changed or better clarified. (Can't recall which.)

[tagteam]

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@Carl wrote:

I can't recall when, but I had one time where I questioned something on the Cornell website. While I never got a response, about a week later I noted that the information I was questioning, was either changed or better clarified. (Can't recall which.)

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I have no idea exactly what you were questioning (or saw on the site), but Cornell (the LII) posts the USC, CFR, Constitution, Federal Rules, et al; they do not clarify the law nor change it unless there has been a change in the actual statute or regs.

https://www.law.cornell.edu/

[boomtown]

Thanks @AnnetteB6 I think your option of "leave the box 3 information blank when you enter the form into your return and then include that amount as rent not reported on Form 1099-MISC" is best. Otherwise the income is reported in 8z.

Following your option puts all the numbers into the correct places on the Schedule 1, which is what counts imo.

[tagteam]

Correct; if the expense is deducted as a rental expense, then the income (in whatever form) is reported as rental income.