Yes, if you operate your rental property as a business then you would be required to send the forms to your property manager and cleaners if you paid over $600 during the year.
If you report your rental as a Schedule E rental real estate property then you are not required to file the 1099s.
Thank you. Going through TurboTax it looks like the rental is being reported on Schedule E. What do you mean operate it as business though vs on Schedule E for reporting? TurboTax's interview indicated I would likely need to file 1099 NECs for independent contractors I paid related to my rental property and the IRS forms read that way, so I am trying to confirm since I would be past the deadline to file 1099 NECs too.
What does your property manager actually do for you, pertaining to the rentals.
It's most common that a property manager takes care of everything to include collecting the rent, and then sending the property own their share of the rent after deducting their management fees. In this scenario it is the property manager that is required to send the property owner a 1099-MISC.
I would advise you consult personally with your property manager to confirm and agree on who sends who, what. Either your property manager will send you a 1099-MISC with rental income reported in box 1. Or you will send the property manager a 1099-NEC with the management fees you paid to them reported in box 1 of that form.
If you are reporting your rental income/expenses on SCH E, then you are exempt from the requirement to issue a 1099 form of any type.
Thanks. I collect the rental income via Airbnb. The Property manager just handles oversight of rentals and maintenance. There’s also a cleaning service as well. I guess why does it matter if business versus schedule E? IRS forms don’t stay anything about that distinction. Just if pay more than $600 to independent contractors and have rental property then file 1099 NECs to them.
I guess why does it matter if business versus schedule E?
Typically, residential rental real estate is reported on SCH E. This type of income is referred to as passive income. Basically, meaning all you do is "sit there" and collect it on a periodic basis. Passive income is subject to "regular" income tax, but is not subject to the additional 15% self-employment tax on top of the regular tax. Additionally, passive income can not be used when figuring the maximum allowed contribution that can be made to a tax deferred or ROTH retirement account, and is not used when figuring what your social security payments will be when you reach retirement age.
For rental property to qualify as a SCH C type of business, one of the major requirements is that you must provide services to your tenant that are directly beneficial to that tenant. For example in your case where you're basically running a short term rental similar to running a hotel, if you provide your tenants like daily cleaning services, then your business would qualify as a SCH C type of business. If you only provide your cleaning and other services between tenants, then that's not directly beneficial to the tenants really.
With a SCH C business you pay regular income tax on the earnings, plus the additional 15.3% self-employment tax. Understand that SE tax is basically your Medicare and Social Security contributions. So "in a sense" that additional 15.3% is getting paid to your future self. Therefore, SCH C income can be included when figuring your allowed contribution maximums to a retirement plan, as well as being including when figuring your maximum social security payment when you reach retirement age.
Now since you've been reporting your income as passive income on SCH E, if you qualify as a SCH C business and wish to switch, you can. But it's not a simple process you can do yourself. You'd be wise to seek professional help in the year you make the change. One thing that changes between SCH E property assets and SCH C property assets, is that while SCH E rental property is depreciated over 27.5 years, SCH C business property is depreciated over 39 years. So it requires a quite a bit of math to make the switch which results in a change in cost basis. Additionally, you still have to manually document the depreciation already taken on the property on SCH E, as you will still be required to recapture that SCH E depreciation in the future even if you switch to SCH C.
Personally, I would not do the switch at this point in time. But if in the future I acquired another property that I was going to rent as an AirB&B or VRBO short term rental, I'd provide my guests with services directly beneficial to them and make sure I met all other requirements to treat it as a SCH C business.
Very helpful. 2021 tax year will be my first rental year so want to make sure Schedule E is optimal and IRS does not require or won’t come back and say I should’ve been filing 1099 NECs… apparently there’s another benefit of business filer in TCJA regarding deduction of pass Thru income along with some other deductions and treatment of sale of the property in future.