Solved: I own a rental property and paid a contractor about $26,000 for renovations, including materials. Am I required to issue a 1099 for the work? I am seeing mixed responses.
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I own a rental property and paid a contractor about $26,000 for renovations, including materials. Am I required to issue a 1099 for the work? I am seeing mixed responses.

This is my only rental property so this is not a ‘business’ for us. Just trying to figure out if I will face a penalty.

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I own a rental property and paid a contractor about $26,000 for renovations, including materials. Am I required to issue a 1099 for the work? I am seeing mixed responses.

A few things to clarify here first.

"this is not a ‘business’ for us"

Yes it is a business. But since that business produces passive income it's reported on SCH E instead of SCH C. That's the difference.

"Am I required to issue a 1099 for the work?"

If you paid an "INDIVIDUAL" to do the work, then the 1099-MISC is required. Otherwise, if the individual is self-employed and you paid their business to do the work, no 1099-MISC is required.

Now just to help out in case it's necessary, and it may not be:

"$26,000 for renovations, including materials."

At that price, this sounds like a property improvement that needs to be capitalized and depreciated over time. This would be entered in the assets/depreciation section and since it will include the amount you paid the contractor, if you issue a 1099-MISC for this, then that 1099-MISC amount you paid is *NOT* a deductible rental expense anywhere. It's included in your capitalization costs.

RENTAL POPERTY ASSETS, MAINTENANCE/CLEANING/REPAIRS DEFINED

Property Improvement.

Property improvements are expenses you incur that add value to the property. Expenses for this are entered in the Assets/Depreciation section and depreciated over time. Property improvements can be done at any time after your initial purchase of the property. It does not matter if it was your residence or a rental at the time of the improvement. It still adds value to the property.

To be classified as a property improvement, two criteria must be met:

1) The improvement must become "a material part of" the property. For example, remodeling the bathroom, new cabinets or appliances in the kitchen. New carpet. Replacing that old Central Air unit.

2) The improvement must add "real" value to the property. In other words, when  the property is appraised by a qualified, certified, licensed property appraiser, he will appraise it at a higher value, than he would have without the improvements.

Cleaning & Maintenance

Those expenses incurred to maintain the rental property and it's assets in the useable condition the property and/or asset was designed and intended for. Routine cleaning and maintenance expenses are only deductible if they are incurred while the property is classified as a rental. Cleaning and maintenance expenses incurred in the process of preparing the property for rent are not deductible.

Repair

Those expenses incurred to return the property or it's assets to the same useable condition they were in, prior to the event that caused the property or asset to be unusable. Repair expenses incurred are only deductible if incurred while the property is classified as a rental. Repair costs incurred in the process of preparing the property for rent are not deductible.

Additional clarifications: Painting a room does not qualify as a property improvement. While the paint does become “a material part of” the property, from the perspective of a property appraiser, it doesn’t add “real value” to the property.

However, when you do something like convert the garage into a 3rd bedroom for example, making a  2 bedroom house into a 3 bedroom house adds “real value”. Of course, when you convert the garage to a bedroom, you’re going to paint it. But you will include the cost of painting as a part of the property improvement – not an expense separate from it.

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Level 15

I own a rental property and paid a contractor about $26,000 for renovations, including materials. Am I required to issue a 1099 for the work? I am seeing mixed responses.

A few things to clarify here first.

"this is not a ‘business’ for us"

Yes it is a business. But since that business produces passive income it's reported on SCH E instead of SCH C. That's the difference.

"Am I required to issue a 1099 for the work?"

If you paid an "INDIVIDUAL" to do the work, then the 1099-MISC is required. Otherwise, if the individual is self-employed and you paid their business to do the work, no 1099-MISC is required.

Now just to help out in case it's necessary, and it may not be:

"$26,000 for renovations, including materials."

At that price, this sounds like a property improvement that needs to be capitalized and depreciated over time. This would be entered in the assets/depreciation section and since it will include the amount you paid the contractor, if you issue a 1099-MISC for this, then that 1099-MISC amount you paid is *NOT* a deductible rental expense anywhere. It's included in your capitalization costs.

RENTAL POPERTY ASSETS, MAINTENANCE/CLEANING/REPAIRS DEFINED

Property Improvement.

Property improvements are expenses you incur that add value to the property. Expenses for this are entered in the Assets/Depreciation section and depreciated over time. Property improvements can be done at any time after your initial purchase of the property. It does not matter if it was your residence or a rental at the time of the improvement. It still adds value to the property.

To be classified as a property improvement, two criteria must be met:

1) The improvement must become "a material part of" the property. For example, remodeling the bathroom, new cabinets or appliances in the kitchen. New carpet. Replacing that old Central Air unit.

2) The improvement must add "real" value to the property. In other words, when  the property is appraised by a qualified, certified, licensed property appraiser, he will appraise it at a higher value, than he would have without the improvements.

Cleaning & Maintenance

Those expenses incurred to maintain the rental property and it's assets in the useable condition the property and/or asset was designed and intended for. Routine cleaning and maintenance expenses are only deductible if they are incurred while the property is classified as a rental. Cleaning and maintenance expenses incurred in the process of preparing the property for rent are not deductible.

Repair

Those expenses incurred to return the property or it's assets to the same useable condition they were in, prior to the event that caused the property or asset to be unusable. Repair expenses incurred are only deductible if incurred while the property is classified as a rental. Repair costs incurred in the process of preparing the property for rent are not deductible.

Additional clarifications: Painting a room does not qualify as a property improvement. While the paint does become “a material part of” the property, from the perspective of a property appraiser, it doesn’t add “real value” to the property.

However, when you do something like convert the garage into a 3rd bedroom for example, making a  2 bedroom house into a 3 bedroom house adds “real value”. Of course, when you convert the garage to a bedroom, you’re going to paint it. But you will include the cost of painting as a part of the property improvement – not an expense separate from it.

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