Rehab and the dreaded W-9

[Account Closed]

I'm about to embark in a fairly comprehensive rehab of a multi-family property (electrical,bathroom, kitchen, sheetrock, and various other improvements. My plan is to fix it up, and increase rents. My question is should I have the contractor sign a W-9 before he starts the project or just keep the receipts and give them to my CPA at tax time? Thanks

[Linda Weygant]

There are many pros and one con to gathering W9s and issuing the requisite 1099s.

PROs

1.  In requesting the W9, you can (and should) also request their general liability and/or worker's comp insurance.  This insures that nobody is going to put a claim in against you for something that is entirely their fault, such as an on-the-job injury or other issue.

2.  In doing the above, you are communicating to the contractors that you are a professional, you expect them to be a professional and you are creating an expectation between the two of you that is nothing but helpful.

3.  Beginning in 2018, there is a new deduction available to landlords, which is the 199A deduction (Qualified Business Income Deduction).  This deduction is available to businesses and, as of now, it is a common interpretation of the law that landlords - even those that only have one property - qualify for this deduction.  However, no court cases have come up in tax court as of yet.

It is a common thought in the profession that - in the event this deduction is ever denied by the IRS - that the more you run your rental like a business, the more likely it is that a court case will be won.  This means issuing 1099s.

CONs

1.  You scare away contractors that are dodging taxes.  And, in my opinion, the people that are cutting corners there are probably cutting other corners.  The money you might save in hiring these folks is rarely worth it in the long run when you end up having to fix the stuff they broke.