Janet Portman – Rent It Right

According to Section 2101, all landlords will have to file “information returns” (in most cases, the IRS 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.

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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!

A. You heard right. On Sept. 27, 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 IRS 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 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 business’s Employer Identification Number). Undocumented workers — those who are not authorized to work in the United States — won’t have SSNs, and some will supply phony numbers. Landlords who submit 1099s with fake SSNs 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.

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By Pamela Dittmer McKuen, Special to the Tribune

One of the early issues tackled by the new Kedvale Gardens Condominium Association in 2004 was renters. The board decided that up to six units, or 15 percent, of the 41 units could be rented at any given time. The policy worked well until a couple of years ago.

“Then the economy blew up,” said Kerry Smith, president of the association in Chicago’s Old Irving Park neighborhood. “People were begging and pleading for us to let them rent. They couldn’t afford to keep their units, and they couldn’t sell either.”

The board responded by granting four one-year hardship exemptions, raising the number of rentals to 10.

A few years ago, renters were largely unwelcome in community associations. Among the arguments: Owners take better care of the property, frequent move-ins tear up hallways, and rental restrictions protect property values. Some associations were so averse to renters that they amended their declarations to ban them.

But times have changed. Financially stressed owners increasingly are asking for exceptions to no-renter policies. Boards often are granting them, just as Kedvale did.

Joanna Dziok, who owns Integral Residential LLC in Chicago and who manages Kedvale, said most of her client associations have “reluctantly” allowed more renters in recent years.

“Boards felt they needed to do something,” Dziok said. “They were getting pressured from both sides, from owners who need to rent and from others who said, ‘I didn’t sign up to live in a rental building.'”

“We decided it was in our best interest to temporarily raise the cap,” said Smith. “No one wants a vacant unit.”

“This is a reversal of trends, driven solely by economic factors,” said attorney David Allswang, of Holland & Knight in Chicago. “Today, when sales are (made) less often, to put it mildly, the option of renting is much more prevalent than the option of selling.”

For some owners, the only other option is foreclosure, which will depress the value of everyone else’s unit, he said.

Foreclosures also strain an association’s budget. It can take six months to a year for lenders to sort out ownership and loan issues; meanwhile, assessments most likely go unpaid, said developer Garry Benson, chief executive of Garrison Partners in Chicago.

“Associations are sensitive about getting a transient reputation if they allow renters, but they often make exceptions because of the opportunity to recoup their overdue assessments,” he said. “It’s all about cash flow.”

That sentiment is echoed by Gene Fisher, executive director of Diversey Harbor Lakeview Association, which represents 30 North Side associations.

“There is little question that the number of condo rentals has increased,” he said. “It’s a concern, but I have a sense that most buildings in this neighborhood have put their concerns about rentals on the back burner as long as assessments keep getting paid.”

Boards are adapting their rental policies to economic conditions in various ways, ranging from rigid to permissive and from simple to elaborate.

Dziok said that some of her buildings lifted all restrictions for a year or two. Others raised prerecession rental caps, generally between 7 percent and 15 percent, to as high as 25 percent. Still others added a second cap for hardships on top of the regular cap. Percentages intentionally are set below Federal Housing Administration owner-occupancy requirements, currently 50 percent, so that buyers can seek government-backed mortgages.

Units that are rented to immediate family members usually don’t count toward the rental pool, she added.

Hardship exemptions are tricky for boards to deal with, said association attorney Allan Goldberg, of Arnstein & Lehr in Chicago.

“Hardship is, pardon the pun, hard to define and can be quite subjectively applied, since the human dynamic can enter into a board’s consideration,” he said. “Each board has its own penchant for factors determining hardship.”

Many boards take the view that the economy itself is not reason to determine a hardship, but they may be sympathetic to owners who have trouble selling their units or who are facing foreclosure, he added.

When considering hardship requests, boards must avoid appearances of favoritism or discrimination. Hard feelings can erupt and potentially lead to legal action when one request is denied and another is granted. The Illinois Condominium Property Act prohibits boards from creating two classes of membership.

Brian White, executive director of Lakeside Community Development Corp., urges associations to offer hardship exemptions, especially when doing so might keep owners from losing their homes.

Hardship exemptions can include reasonable conditions, perhaps requiring owners to undergo credit counseling or landlord training, or limiting the length of the rental to 12 months, he said.

“During that time, the unit owner should be making steps to resolve whatever barrier led to the hardship request,” he said.

Some associations have determined how often units may be rented, set up waiting lists and protocols for moving up and down the waiting list, and made rules for sublets, said Goldberg.

Dziok separates hardships into two categories: medical and financial. Medical hardships, such as when an owner must temporarily move in with an ailing parent, are easier to prove. Financial hardships are a little tougher.

“To not get into a legal pickle, my boards have left open to interpretation what is needed to prove the hardship,” she said. “They’ll take whatever documentation the owner wants to provide, but they won’t require specific bank or tax records. If the owner provides nothing, that doesn’t work in their favor.”

Allswang’s preference is for boards to create a relaxed rental policy for all owners rather than hardship exceptions for a few.

“Administratively, it’s easier,” he said. “With a hardship provision, you need to deal with owners case by case, which can get very personal and very emotional. People aren’t so keen on providing all the information why they have a hardship.”

He offered an example of a relaxed policy: “You might say, ‘The window is now open for two years for all owners, and after that, we’ll re-evaluate. The market might be different then.'”

Before implementing a new rental policy, boards must check their governing documents to see if they have the authority to make changes. A declaration that prohibits all leasing must be amended by a supermajority of owners. A declaration that prohibits leasing but contains a hardship provision gives the board more leeway to allow exceptions. Rules and regulations that address leasing can be changed by a board vote.

Back at Kedvale, a couple of the hardship rentals recently sold. The board is hoping for speedy resolution for the other two cases, so they can get back to their original six rentals.

“The economy has been a real issue for us,” said Smith. “We had to give people a chance to recover.”

Link: http://articles.chicagotribune.com/2010-11-19/classified/ct-mre-1114-hardship-rentals-20101119_1_rental-restrictions-condo-rentals-renters