Do I need to issue 1099-MISC to my investment rental property manager?

[surgeon92]

I have a property management company that manages an investment condo rental I own. Let's say they collect $10,000 total in rent for the year. Let's say they keep $1,000 total for the year for fees/commissions, and disburse the rest ($9,000) to me. At the end of the year, they issue me a 1099-MISC form showing an income (to me) of $9,000.

That all seems straightforward. But, do I need to issue them a 1099-MISC showing income (to them) of $1,000 (since it is over $600).

In TurboTax, it asks if I need to issue a 1099-MISC to anyone and it lists a common example as "Property Management". So, I have paid $1,000 aggregate to a property management company in 2014. Do I issue them a 1099-MISC? I see lots of other answers on TurboTax saying that investment property owners don't need to issue 1099-MISC forms at all. So, why is TurboTax asking me if I need to if everyone seems so clear that the answer is no.

[CalCountry · Accepted solution]

The key is that TurboTax does not already know if you must send a 1099-MISC.  The answers to questions surrounding whether you must issue a 1099-MISC are not always absolutely clear.

Unless you are in the business of renting properties, the payments you make to your rental property manager are not what the IRS publications refer to as "in the course of your business or trade."  That implies unless you're in the rental business, you do not need to give a 1099-MISC to your property manager any more than you need to give one to the neighborhood kid who mows your home's lawn.  Additionally, if the property manager is a corporation, you are exempted from having to issue a 1099-MISC to them.

However, the property manager will send a 1099-MISC to you (and you will need to report that as income), since that is a payment to you made in the course of the property manager's "business or trade."  I also presume the property manager "passes through" to you any expenditures for your property(ies) that you pay in order for you to include them as rental property expenses.

There's an interesting discussion of the difference between rental activity as a business versus an investmnent at nolo at:
   http://www.nolo.com/legal-encyclopedia/is-your-rental-activity-business-investment.html

(See also the additional later commentaries, below)

[surgeon92]

Thanks CalCountry. After digging around the internet more, I think I would determine that I do need to send a 1099-MISC to my rental management company for "services rendered". The rental properties I own I do unofficially treat as a "business" I run. That is, I own the rental properties primarily for the purpose of making profits. Therefore, the rental management fees I pay to the rental management company would be "in the course of my trade or business".

[CalCountry]

As I mentioned, the topic is debatable.  Certainly it never would be wrong to issue a 1099-MISC.  However, surgeon92, you began your original post with the words "investment condo."  Right off the bat, that would appear to distinguish your activity as an 'investment' rather than as a 'business.'

Not meaning to be argumentative, I suggest that if a rental activity is conducted as a "business," then a Schedule C should be prepared and self-employment taxes paid.  See what I mean about the ambiguous nature of the 1099-MISC form?  My position is that "any business may be a for-profit activity" but "not every for-profit activity is a business."  The IRS publications define a business as a for-profit activity, but they don't say that a for-profit activity is necessarily a business.  Support that I offer is that a Schedule E reporting rental income and expenses for a rental "investment" may be filed in lieu of filing a Schedule C for a rental "business."

I am also concerned about the 'reverse implication' of issuing a 1099-MISC.  If one issues a 1099-MISC to report payments to an entity such as a property manager, wouldn't the IRS therefore be expecting to see a Schedule C/C-EZ, including payment for self-employment taxes, filed for the 1099-MISC issuer's "business?"

Also note the following sentence from the IRS website at:  <a rel="nofollow" target="_blank" href="http://www.irs.gov/publications/p925/ar02.html">http://www.irs.gov/publications/p925/ar02.html</a>

"A trade or business activity does not include a rental activity or the rental of property that is incidental to an activity of holding the property for investment."

[mike47401]

i think the question to address here is passive vs active participation. would passive participation generally mean no 1099 MISC?

[CalCountry]

mike47401 -- There is a distinction between the terms "passive activity" and "material participation."  For non-business owners, all rentals are passive activity.  The operative concern here is whether a taxpayer's rental activity is a "business" or an "investment" and whether or not the taxpayer must issue a 1099-MISC to the property manager.  There is a very good series of paragraphs outlining the implications of rental activity, passive activity, material participation, and business definition; (about 10% down the page beginning with the section titled "passive activities") in the IRS overview of Publication 925 at:
   <a rel="nofollow" target="_blank" href="http://www.irs.gov/publications/p925/ar02.html">http://www.irs.gov/publications/p925/ar02.html</a>

In particular, note the following sentence from that page:
"A trade or business activity does not include a rental activity or the rental of property that is incidental to an activity of holding the property for investment."

[wbs_gv]

Suppose that we didn't see this hot debate and a 1099-MISC was already issued to our property manager.  In the Rents and Royalties section it asked if we issued a 1099 for services, and I replied yes.  However, it never followed up with asking the details such as who it was issued to.  I am concerned now that my TurboTax return won't be consistent with the documents the IRS has, so where do I enter the information such as the recipient of the 1099-MISC?

[CalCountry]

wbs_gv:
See the information about the TurboTax "Quick Employer Forms" feature at:
   <a href="https://ttlc.intuit.com/questions/1900677-what-is-quick-employer-forms" rel="nofollow" target="_blank">https://ttlc.intuit.com/questions/1900677-what-is-quick-employer-forms</a>

The Quick Employer Forms feature is directly accessed at:
   <a href="https://quickemployerforms.intuit.com/signin.htm?url=https%3A%2F%2Fquickemployerforms.intuit.com%2Fw..." rel="nofollow" target="_blank">https://quickemployerforms.intuit.com/signin.htm?url=https%3A%2F%2Fquickemployerforms.intuit.com%2Fw...>

[wbs_gv]

That really doesn't seem to be addressing my issue.  I've already mailed in the 1099-MISC for the property manager.  Now I just want to make sure my tax return reflects and is synced (with whatever information the IRS needs) so that neither I nor the property manager create any problems with our individual returns.  For instance, is there not someplace on my tax return where I note the name and tax ID of 1099-MISC recipients for those I have sent?

[CalCountry]

I think you missed the point.  Use the Quick Employer Forms to create a 1099-MISC that is the same as the one you already issued.  In addition to creating the form, it will also offer to e-file the required "information return" Form 1096 report to the IRS (which is submitted independently from your personal tax return).  Then, since you already sent a 1099-MISC to the recipient, you can discard the payee copy produced.  Your tax results are unaffected whether or not you issued a 1099-MISC.  The transmission of the 1096 information return to the IRS separately correlates with the expense claimed in your tax return, while it also documents the recipient's income to the IRS.  Voila!

[wbs_gv]

Thank you for following up.  I did miss the point earlier.  I have created the form, but am I correct that I should not click on "E-FILE", or do I need to click on that to finalize the form and create the needed import information to my tax return?  I don't want to mistakenly select E-file and generate a duplicate form to the IRS.  Thanks for your help.

[CalCountry]

In using the Quick Employer Forms feature, you e-file the necessary "information return" Form 1096 which merely reports your 1099-MISC issuance to the IRS.  It is not related to, and has no impact on, your regular income tax return.  It does not represent 'double counting' the expenditure being reported.

Issuing and reporting a 1099-MISC is an activity separate from preparing and e-filing your tax return.  It doesn't "import" anything to your tax return.  You already have accounted for your expenditure when you prepare your tax return and e-file it separately.  Your income tax return does not per se directly "submit" any 1099-MISC to the IRS.  That is why a separate "information return" is used to report the issuance of a 1099-MISC.

[linwang]

Dear CalCountry, Thank you for your answers and discussion. As a property manager, I wonder if I need to report the amount from form 1096 (sum of all the 1099 to all landlords) on my schedule C somewhere? Now get back to Surgeon92's scenario, shouldn't he be getting a 1099 in the amount of $10,000 instead of $9,000? Thanks and look forward to your reply.

[surgeon92]

Hi linwang
You are right. This year, my property manager issued me a 1099-MISC for $10,000 (for example), not $9,000. But, I think my original question is still valid, regardless of whether the 1099-MISC from them has $10,000 or $9,000 (in the example).

[CalCountry]

I'm glad we're all still watching this.  😉
linwang's question implies that he/she is on the other side of the problem. That is, as a property manager who has issued 1099-MISC forms to rental property owners.  See this thread answering your previous question for an explanation:
    <a rel="nofollow" target="_blank" href="https://ttlc.intuit.com/questions/2202773">https://ttlc.intuit.com/questions/2202773</a>