Need advice on 1099 filing confusion with a co-owned rental...

[Raphael Schwartz]

Looking to source some wisdom from the experienced CPAs/Tax professionals on here.

My unmarried partner and I co-own a duplex in TX. We live on one side together and rent out the other side (medium term furnished rental). Her and I own the property equally and split all income and expenses equally. We of course don't actually split each individual expense at the point of sale, but make sure we are squared up every month or so. (We have not used a joint business checking account because this is a duplex that we also live in so it would seem to only serve to confuse things since nearly every large expense is a mix of rental business and personal - renovations, mortgage, utilities all are mixed between business and personal.) Our personal and rental record keeping has been pretty meticulous - all receipts have been kept and expenses documented and tracked. Nothing too complicated really (for the most part).

I have read multiple books on rental taxes and feel quite comfortable with it mostly but I need some advice for filing 1099-NEC information returns for expenses on the rental side. We have had some expenses paid to independent contractors (such as a 10k renovation) that require filing a 1099.

For me and her to both claim these expenses as a deduction we both ought to file 1099s. I would imagine it best that we both file a 1099 to the contractor for our half of the expenses. Does this require us to actually split the payment and send the contractor separate checks from our personal checking accounts? Or can I make the payment myself and she reimburse me (which is much, much more convenient when many expenses are involved). If I write a check for the entire amount myself would it still be appropriate for her and I to both send a 1099 to the contractor, each of which reflects our half of the expense? Or if I write the check to the contractor does she have to send *me* the 1099 for her half (5K in this example), and my 1099 has to reflect the full payment to the contractor (10k). In that case my return would show an additional income of 5k...? This seems extremely unwieldy. I guess what I'm asking is can one co-owner file a 1099 when they did reimburse half the expense but did not make the payment directly - assuming we have a spreadsheet that documents we are square on the rental expenses by the end of the year? Or does IRS need receipt for evidence of direct payment to the contractor?

PS Please do not recommend we form a Partnership, we do not need to do so and that is not the appropriate solution for us here. We do not provide "services" to tenants.

PPS On the *income* side I am aware of the IRS guidance asking that if i receive a 1099 for rental income that I send the co-owner a 1099 for "nominee recipient adjustment". I have also read that tax professionals may view that 1099 as unnecessary as long as I list that 'nominee recipient adjustment' on Schedule E line 19. I have not seen any similar guidance for expense sharing though!

[Sean O'Keefe]

@Raphael Schwartz you need to issue 1099s to the contractors if the amount paid was at least $600 and falls into specific categories. The 1099s need to be issued by January 31, 2024 (for the amount of payments made to contractors Jan 2023 - Dec 2023) More here from the IRS.

Issue a 1099 to each of the contractors you paid in 2023 that meet the IRS requirements and make sure that it includes the full amount that you paid them in 2023 so the IRS is aware (this is what is important). If you need to reimburse each other in the background to make sure the expenses related to the 1099s are split based on ownership then that's fine.  

When you file your tax return you can use the sqr footage method to split costs btwn the side you rent and the side you live in (a.k.a. a house hack) then use % ownership to report the rental on your individual tax returns.

For 2024, get a bank account that is dedicated to the property and have all of the rent and expenses included in this account. When you need to fund expenses that exceed rental income you can both deposit cash in the account (owner's contribution). Then this won't be an issue for 2024 since all of the joint expenses have been paid out of one bank account joint funded through owner contributions. This will also make your life easier at tax time and your tax preparer will love it. 

Since you placed the property in service you can start depreciating the investment property and the renovation costs that you paid to contractors in 2023 (bonus depreciation is something to think about here).

If you don't get an LLC @Bill Brandt will be happy to hear this since he hates LLCs. I on the other hand think having an LLC can protect your personal assets but it sounds like you are already aware of this. 

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*This post does not create a CPA-client relationship. The information contained in this post is not to be relied upon. Readers are advised to seek professional advice.