Am I required to issue 1099s to contractors if I only have one rental unit?

[Joel R.]

Hello Everyone! I am looking for some advice regarding the 1099 / 1099-NEC tax forms and whether or not I must issue these to contractors for my specific rental property. I currently own just one property (a duplex) and it is owner-occupied, I live in one unit and my tenants rent the other unit from me. I bought my home at the very end of 2021 but really didn't do any work on it or collect rent in 2021. 2022 is when I really started to do work on the rental side/unit of my property. I did a lot of repairs myself but also hired a few skilled contractors for things like electrical work and plumbing. I did pay these contractors over $600 for their services and all of this work was for the rental unit, not my personal/living unit. Note: This all pertains to the 2022 tax year and I still have a W-2 job which is the main source of my income.

Given I've only owned a rental for one year (also my first home ever) and I'm very new to rental-related taxes, I of course hired a "good" tax advisor/CPA to help ensure I stay out of trouble with the IRS. I actually hired this tax company in the Fall of 2021 to do my 2021 return and continued using him for this year (2022 return). So from the start, I have had a tax guy in my corner who I thought would help ensure my taxes were done properly... or so I thought.

Now jumping to the here and now, my tax guy is in the middle of my 2022 return and I have been asking him questions back and forth for weeks and making sure he has everything he needs from me. Then just yesterday, I come across the 1099 / 1099-NEC form requirements online from my own research. I immediately reach out to him asking if 1099s apply to me and whether or not I needed to send these to my contractors (as mentioned above). He responds informing me that I indeed needed to issue 1099s and this was required to be sent out by 1/31/2023. In addition, he also informed me he is not on contract to render me 1099 filing support and basically said I'm not going to help you, good luck on your own. Fair enough that he's not on contract for that, but it really would have been great if he could have informed me that this was a thing and that there was a deadline. Now It appears I am in trouble and at the very least will be looking at late penalties for not filing by 1/31/2023.

* This is where the crux of my question comes to... Since my tax guy is of no use, I reached out to a friend who works for a different tax group/CPA and this new firm was kind enough to look into my predicament. After a phone call with this new tax company, they informed me that I actually DO NOT need to issue 1099s for my specific situation. And furthermore, they said they have never had any of their clients with less than three rentals send out 1099s! Their rationale is that with my W-2 income and the fact that I only have one rental unit I am not considered to be in the “trade or business of renting a property” and therefore the 1099 filing requirements don’t apply. After some digging, I found a helpful and very recent article that appears to agree with this (see link).https://www.keepertax.com/post...

At this point, I am feeling a little better because it seems I may actually be just fine (i.e. no need to issue 1099s)! But I’m still not 100% sure which is the correct answer... I still see a lot of articles online stating that I need to do 1099s. Any advice on this would be extremely appreciated! Thank you!

[Sean O'Keefe]

Quote from @Michael Plaks:

Quote from @Joel R.:

Hi @Steve Vaughan

Thank you for your feedback, really appreciate it! No, none of my contractors were labeled/considered to be corporations. I agree that most of what I have read implies 1099s need to be issued, but there are a few articles, like the one I shared in my initial post that make me wonder... And when I have two different CPAs that disagree, it really makes me wonder haha.

I did not see your question when it was originally posted. It has been discussed on this forum multiple times, you can search the forum for earlier threads.

The reason CPAs disagree is because it's somewhat controversial, especially between accountants who do NOT specialize in real estate. The confusing and seemingly contradictory IRS guidance on this matter does not help. 

However, pretty much all tax professionals on this forum, and we do specialize in real estate, are on the same page. The short answer: YES, you usually need to send 1099s if you're a landlord, regardless of the number of units.

The confusion comes from the fuzzy definitions of "running a trade or business." If you ARE running a trade a business - 1099s are required. If you are NOT running a trade or business - 1099s are not required.

The main reason why you WANT to be "running a rental trade or business" is your eligibility to claim business overhead deductions, such as marketing, education, technology, and so on. But once you declare to be running a trade or business - then 1099s do come with the territory.

If you really want to avoid 1099s and decide to claim to NOT be running a trade or business - be prepared to lose your business overhead deductions upon an IRS audit. You will only be entitled to the deductions directly tied to the property, such as interest, taxes, insurance and maintenance. 

So, it's either-or:
A. You operate a trade/business - then you have all deductions AND an obligation to issue 1099s
B. You do not operate a trade/business - they you avoid 1099s, but neither can you use business overhead deductions.

Disclaimer: you cannot simply claim to be running trade or business, it's not some checkbox election. You need to qualify. This can get technical, and it is case by case, to be discussed with your tax accountant. The size of your rental operation is one of the factors in this determination.

Great answer from @Michael Plaks