If you're a first-time landlord confused by your rental property taxes, mainly when to issue and file a 1099-NEC, you're not alone.
According to Nolo.com, there has always been some confusion about if and when an independent landlord should file 1099 tax forms. Then the IRS announced the 1099-NEC, and there was even more confusion. While the IRS doesn't make filing taxes any easier when they change things, in this case, the change could reduce your tax bill.
Read on as we walk you through what landlords need to know about the 1099-NEC, why and when one must be filed, and how filing can benefit you.
Rental Property Taxes: 1099 Requirements for Landlords
There are many types of 1099 forms. However, there are only two that you'll typically encounter as a landlord.
1099-MISC
If you pay an individual or LLC at least $600 during the tax year in office rent or legal settlements, you must file a 1099-MISC. The 1099-MISC is primarily the same as it has always been except you no longer use it for payments to independent contractors.
1099-NEC
Payments to independent contractors now go on a 1099-NEC. The 1099-NEC is nothing more than a separate form for reporting what previously went in Box 7 of the 1099-MISC.
NEC simply stands for nonemployee compensation. It is a form that tracks payment to a nonemployee (i.e., independent contractor) you compensated (paid) for services.
It gets a little tricky that you also must have any independent contractor you hire fill out a W9 to keep on file. This could include your rental's plumber, a website designer, or anyone else you pay for business services.
If you pay that contractor $600 or more during the tax year, you are required to issue them a 1099-NEC come tax season and also include it when you file your taxes.
You do not need to issue or file a 1099-NEC if the total payment to the contractor is less than $600 for the year. You do not have to issue one to any company you hire that is a corporation or LLC taxed as a C or S corporation.
Tax Benefits of the 1099-NEC
There are several tax benefits of owning rental property. The 1099-NEC may provide additional rental property tax deductions.
Filing a 1099-NEC can help establish your rental as a business rather than an investment in the eyes of the IRS. Here are a few of the deductions you could qualify for as a business:
- the pass-through tax deduction (part of The Tax Cuts and Jobs Act)
- start-up expense deduction
- home office deduction
Refer to a Professional
It might feel overwhelming when you first become a landlord and start filing rental property taxes. You don't want accounting mistakes to land you in hot water with the IRS. You may need to refer to an accountant to ensure you're getting it right.
A full-service property management company can make every other aspect of owning rental property more manageable. Contact us today to learn more about our services.