Owners of rental property will soon face tough new tax reporting requirements and stiff penalties if they don’t comply. The federal law that goes into effect Jan. 1 applies equally to landlords of multiple units, investors with a handful of properties and individuals who own a vacation home that they rent out for part of the year.
“This is going to create a lot of chaos,” Thomas Hood, president of the Maryland Association of CPAs, said of section 2101 of the Small Business Jobs Act of 2010.
For the first time, the Internal Revenue Service is treating rental property as a trade or a business for Form 1099 reporting purposes, said Steve Wiseman, a CPA, which means that starting in the new year, Marylanders will have to keep records of any service to rental property that amounts to $600 or more per service-provider during the course of the year.
Of his clients who own rental property, Wiseman said, most do so as vacation homes that they rent out to help defray the cost. The federal law applies to any property, from Delaware beach condos to Florida getaways, if it generates rental income. Maryland residents are required to report all income, even if coming from out-of-state.
Determining how many Marylanders own rental property is not easy. Ron Wineholt, vice president of government affairs of the Maryland Chamber of Commerce, estimated that of the approximately 1.5 million residential properties in the state, 1.3 million are owner-occupied, which leaves some 200,000 owners with rental property, including vacation homes. Wineholt formerly worked at the State Department of Assessment and Taxation.
The imminent arrival of section 2101 seems to be a well-kept secret, particularly for owners of vacation homes.
“There has been very poor communications for folks with second homes,” said Mark Feinroth, director of regulatory affairs for the Maryland Association of Realtors.
Feinroth’s group has briefed Realtors about it so they can inform people who are considering a vacation home.
“But if you’ve owned your home for years or you don’t use a CPA for your taxes, it’s very unlikely you know about this provision,” he said.
Indeed, Alfred Singer, president of the Maryland Property Owners Association, said most of the group’s members appear unaware of the new law, including himself. “I’m going to have to look into it,” said Singer when informed of section 2101.
Ben Frederick, president of the Property Owners Association, which represents landlords and developers of affordable housing in Baltimore City and Baltimore County, is anticipating that the law will be “a huge problem, a huge burden.”
“To have anyone do any level of service, you have to get a W-9 [tax form] from them beforehand or you can’t use them,” Singer said. “We are an entrepreneurs’ business. It bogs down the whole system while increasing costs.”
Efforts to repeal section 2101 have so far failed. The American Institute of Certified Public Accountants last month sent a letter to members of the U.S. Senate with a repeal request, and an attempt to do so by Sen. Max Baucus, a Montana Democrat and chair of the Senate Finance Committee, was defeated.
“Right now, repeal is up in the air,” said Abe Schneier, senior technical manager of the AICPA’s tax staff, noting that one reason it failed was concern over lost revenue. The Senate committee estimated section 2101 would generate $2.5 billion over a 10-year period.
Another reason for failure is because the law is intended to address a thriving underground economy.
“Everyone’s got a story about a contractor who comes to the house and says, ‘I can cut down that tree’ or ‘I can repair that driveway,’ and ‘By the way, I want to be paid in cash,’” Schneier said.
Maryland CPA’s Hood agreed. “Congress is attempting to catch the small service-providers — the painters, plumbers, landscapers, and handymen — who do not report their income,” he said.
It is the property owner’s responsibility to get the necessary — and correct — information from the service providers. That may not be so easy, said Allen DeLeon, a CPA in Gaithersburg.
“You’re going to have to get the name, address and tax ID number from all service providers, including those who may not be U.S. citizens,” he said.
Moreover, DeLeon said, the property owner is liable for filing incorrect information or for not filing at all. Under the law, fines for filing incorrect information will double, with a maximum penalty of $100 per 1099 form. Fines for not filing at all will double, to a maximum penalty of $200 per 1099 form.
Schneier of AICPA does not rule out the eventual repeal of section 2101. But it would have to happen as part of another tax-related piece of legislation. Congress is looking at many tax issues and “there’s a chance it could be included in a tax package,” he said.
In the meantime, though, “because there’s been the hypothesis that it would be repealed,” said Schneier, “there hasn’t been much publicity about it.”