If I get roommates in my primary residence, send 1099-NEC forms to contractors & IRS?

Question

For a decade, I've rented rooms to one or two roommates in my primary residence.  I do no other real estate business.

For the first time, I expect unusually high expenses for contractors at my house.  Must I begin issuing IRS 1099-NEC forms, each time I pay for significant ($600+) repairs or landscaping?

Am I "running a trade or business" according to federal and California rules?

Stephen Nelson · Answer

I think it's questionable as to whether you're running a trade or business. (That would be the trigger for the requirement to send 1099s to unincorporated vendors you're paying more than $600 to.)

I would also think you want determine whether the Section 280A rules about mixed use dwellings applies in your case. (TLDR summary of Section 280A: You don't get to deduct expenses of a personal residence except to the extend you have income.)

Note: Section 280A is also the chunk of tax law that creates the home office deduction and the Section 280A(g) exclusion which is better known as "Augusta Loophole."

Jason Malabute · Answer

Yes, Erik, you are operating a business in this situation. Renting out rooms in your primary residence, especially when you’re regularly receiving rental income and incurring significant expenses for repairs or landscaping, meets the IRS criteria for running a trade or business.

Because of this, you are required to issue 1099-NEC forms to contractors if you pay them $600 or more in a year

Rick Pozos · Answer

It sounds like you have been making income from your house all this time. There may some little expenses here and there, but nothing big. NOW that you have some bigger expenses, you want to claim them on your taxes?? BUT you have not been claiming the rent as income.

You, as the homeowner, would have to change the a/c, get sewer lines unclogged, change out appliances, etc. anyway even if you were not renting rooms out.

You can not have it both ways. You have been taking income, well...you are going to have some expenses also. Take the good with the bad. Pay the expenses and be glad you have made tax free money all this time.

Bruce Woodruff · Answer

Yes, technically you are. Do you have a business license and fictitious name license? A separate checking account for your RE transactions???

Ashish Acharya · Answer

@Erik K. If you're renting rooms in your primary residence and not operating as a landlord or running a real estate business, you're not considered engaged in a trade or business, so you're not required to issue Form 1099-NEC to contractors, even if payments exceed $600. This applies under both federal and California rules.

However, if you're reporting rental income on Schedule E, you may still deduct a portion of repair or landscaping costs based on the rental portion of your home. Keep clear records, and confirm with a tax professional, especially in California, to ensure compliance as your situation evolves.

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

David Orr · Answer

A lot of the replies in this thread aren't quite correct.  Not all rentals are automatically meet the criteria to require sending 1099s to contractors.If the rental is not considered to be a § 162 trade or business, then you don't have to send 1099s.  The tax code doesn't clearly define a "trade or business", but we have a general understanding of it mostly through tax court cases.  Most rentals are operated like a business, with a profit motive, and most rentals are a trade or business, and so require sending 1099s.  But not all.

In this situation, where you "rented rooms to one or two roommates in my primary residence", that may actually be a good example of a situation where you could reasonably take the position that this is not a trade or business, and therefore you don't have the obligation to send 1099s.  That's as close as any of us can say with 100% certainty what the correct answer is, because there is no definite answer.  But the IRS is well aware of the uncertainty surrounding the question of when rentals are a trade or business, so they seem to err on the side of not often enforcing the 1099 requirement for rentals very often for that reason.  On the other hand, the safe option is to send them anyway, and that way there's no risk, so for most rental owners, I usually recommend they do send them.This qualification doesn't affect whether or not you can deduct expenses, or what schedule the rental is reported on.  But the criteria for including rental income/loss in QBI is the same "trade or business" criteria, so it does affect whether you should claim a QBI deduction for the rental (don't claim a QBI deduction for it if you aren't sending 1099s).David OrrTax Modern

John Morgan · Answer

If you’re not claiming your home as a rental for write offs then I wouldn’t 1099 anyone. Just keep the cash and keep quiet.

Bruce Woodruff · Answer

You're running a business here, albeit a small one. If you're going to continue this arangement, I would make it legit....the penalties, if caught, are not worth it, especially for a small operation like you are running.

Erik K. · Answer

I always reported my rental income in TurboTax, and indicated expenses too (because I get credit for a fraction of expenses due to renting a fraction of my homes floor area).

Erik K. · Answer

Thank you for answering my post.  I never obtained a license, nor a separate checking account.  When I sign rental agreements with new roommates, I personally am named as the landlord.

If I get roommates in my primary residence, send 1099-NEC forms to contractors & IRS?

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