As of January 1, 2011, more rental real property owners ("landlords") are now required to keep detailed expense records and make 1099-MISC information returns ("returns") as they became subject to certain reporting requirements for expenses incurred in relation to their rental properties.
Under Internal Revenue Code Section 6041 as it existed in 2010, only those landlords who were engaged in a "trade or business" were required to make returns for expense payments of $600 or more made in the course of their trade or business during the course of the year. Thus, as it stood in 2010, landlords who were not engaged in a trade or business of renting real property were not required to make these returns to the Internal Revenue Service ("IRS"). Although there is no hard rule for when the renting of real property constitutes a trade or business, in general, it will only constitute a trade or business when it is carried on for livelihood or profit, as compared to mere investment. This general principle would typically remove the renting of a single residence from being deemed a trade or business, but there has been some inconsistency among the IRS and the courts on this point.
Nevertheless, the recently-passed Small Business Jobs Act has nestled within its terms a provision that amends Section 6041 by providing that all persons who receive rental income from real estate are considered as being engaged in a trade or business of renting property. Consequently, as of January 1, 2011, all landlords, not just those who are engaged in a trade or business of renting real property, are required to make returns for payments over $600 incurred in relation to their rental property and made during the course of the year. This broad provision will apply to landlords of property rented for both business and personal use, with the only exceptions to the more broad-based reporting requirement being those landlords who derive substantially all of their rental income from renting their principal residence on a temporary basis, those who receive rental income below a certain threshold (to be later determined by the IRS), and those who can show that the reporting requirement would cause hardship.
In addition, a separate provision in the Small Business Jobs Act amends Internal Revenue Code Section 6721 to increase the minimum and maximum penalties that may be assessed against a taxpayer for a failure to make a return, making the return late, or a failure to include the necessary information on the return.
Thus, not only will the reporting requirements imposed by Section 6041 apply to a broader base of landlords, the consequences for not meeting the reporting requirements will become more expensive. As a result, landlords will need to be diligent with their record keeping and accounting for expenses paid in this new year.
Otten Johnson's Business Transactions & Capital Markets practice group has substantial experience in dealing with tax issues for landlords. For more information on this Client Alert or on addressing such issues, please contact any of the attorneys in the Business Transactions & Capital Markets practice group (for a listing, click here).
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