Q: I’ve heard that the new tax bill signed by President Obama in late September 2010 affects landlords — that we will have to file 1099s when we pay contractors over a certain amount. Is this so? What a pain! –Chris F.
A: You heard right. On Sept. 27, 2010, President Obama signed the Small Business Jobs Act of 2010, a hefty bill that aims to spur small-business hiring through measures designed to make credit more available and to give small businesses many tax breaks.
But deep within the bill there’s a section titled "Reducing the Tax Gap" (Subtitle B, Part I), and you can imagine what that means — bringing back into the Internal Revenue Service tax coffers some of the money that the rest of the bill leaves in the pockets of those small businesses. The landlord provision is one of them.
According to Section 2101, all landlords will have to file "information returns" (in most cases, the IRS’s Form 1099-MISC) when they pay a service provider (such as a plumber, accountant or landscaper) $600 or more during the tax year. The 1099 filing requirement applies only to payments to service providers who are not incorporated, (with the exception of lawyers).
In other words, payments to corporations (other than legal corporations) are exempt, as are payments for goods (such as appliances or furnishings). Landlords must also send these 1099s to the provider.
Until now, only landlords who were actively engaged in running their business (by managing day-to-day activities, for example) were required to file 1099s. "Investors" (owners who turned over all or most management duties to someone else) didn’t have to file them.
The new law declares that even investor landlords must send 1099s, and it applies to payments made after Dec. 31, 2010.
And how, you may wonder, will filing 1099s result in more money to the tax man? Once the IRS receives the landlord’s 1099 showing that it paid a contractor a specified amount, the IRS will expect that contractor to pay taxes on that income.
Contractors know this, and feel pressured to report — and pay — accurately, or face fines. According to the Senate Finance Committee, the number of increased tax filings will result in additional revenue of $2.5 billion over a period of 10 years.
The reporting requirements apply only to landlords whose rental income is over a threshold amount, which is yet to be determined, in regulations that will be issued by the Secretary of the Treasury. And the law includes some exceptions.
People who are renting their principal place of residence on a temporary basis — such as renting your home while you spend three months away on vacation — are exempted, as are active members of the military and members of the "intelligence community."
Anyone for whom the requirements would pose a "hardship" may also be exempted; the definition of a hardship will also be contained in regulations that are yet to come.
So the message for most landlords who report income from their rentals is this: Get ready to prepare and send 1099s to every covered service provider who maintains your property or helps you run your business, if you pay that provider $600 or more per tax year.
And incidentally, there’s a twist: To complete a 1099, you’ll need an individual’s Social Security number (or the company’s Employer Identification Number). Undocumented workers — those who are not authorized to work in the U.S. — won’t have Social Security numbers, and some people may supply phony numbers.
Landlords who submit 1099s with fake Social Security numbers may get caught by the IRS, which checks the numbers against their records.
While the IRS has historically not turned this mismatch over to immigration authorities, they have gone back to the hiring firm (the landlord) and demanded that the landlord begin backup withholding for that worker (such withholding must begin within 30 days of being notified by the IRS of the mismatch). The IRS has a very detailed publication on this topic, called Publication 1281, "Backup Withholding for Missing and Incorrect Name/TIN(s)."
The penalties for failure to file informational returns have been increased. These penalties alone will narrow the "tax gap" to the tune of $421 million over 10 years, according to the Senate Finance Committee.
Q: When I moved into my apartment in April, it was clean and roach-free. But then the critters appeared, and even though management has treated them several times since then, they keep coming back. Now, six months into my yearlong lease, I’ve had it — I want to move. Can I leave without negative consequences? –Elaine E.
A: In every state but Arkansas, landlords must offer and maintain rental property that is "fit and habitable." This duty is known as the "implied warranty of habitability."
The word "implied" is important: It means that this duty is part of the deal, by law, even if the landlord makes no explicit promise to provide fit premises, does not include the promise in the lease, or even is completely unaware of this legal obligation. Except in very narrow circumstances, a tenant cannot waive (give up) the right to livable premises.
When landlords fail to offer or maintain fit premises, tenants have the option to move out and, in some states, to withhold rent or fix the problem themselves and deduct the expense from their rent (known as "repair and deduct").
Many states are very specific about the conditions that render premises "fit and habitable," specifying the availability of hot water of a minimum temperature, the provision of leak-proof roofing and windows, adequate bathroom facilities, and so on. A typical entry on these lists is a home that is free of vermin. By everybody’s standards, roaches are vermin.
Many times, landlords refuse to address an infestation; when that happens, it’s pretty clear that the tenant can move out. But this remedy is also available even if the landlord is trying hard to solve the problem, which sounds like your situation.
The landlord’s good faith effort to deliver fit and habitable premises doesn’t deprive you of your right to move out if his efforts aren’t successful.
You’ll want to read your state’s law on the landlord’s duty to maintain rental property, and pay special attention to tenants’ remedies if the landlord fails. You may need to write a final demand letter, giving the landlord one last chance to fix the problem, before moving out.
Hopefully, you’ve kept a record of all of the times you’ve called management and asked for service. Be sure to keep these records in case you need them later — your landlord may consider your lease-breaking unjustified and decide to keep your deposit as compensation for lost future rent.
