FORM 1099-MISC FOR PAYEES IN REAL ESTATE SETTLEMENTS
DO YOU REALLY NEED TO WORRY ABOUT THIS?
We are often asked about the necessity of issuing an IRS Form 1099-MISC to entities and individuals receiving payments through real estate settlement transactions. The short answer is: Probably not, but read on. In a typical real estate settlement, payments are made to:
- Sellers (if a sale) for proceeds;
- Lenders for fees;
- Real estate brokers and/or agents;
- Outside abstractors;
- Outside notaries;
- Outside attorneys;
- Title insurance underwriters;
- Various Inspectors;
- Government entities for recording and other fees;Miscellaneous service providers and, of course;
- Settlement and other fees paid to the title and/or settlement agents
We all know that, except in specific instances, sellers of real estate are to receive a Form 1099-S for the gross proceeds from the transaction (see more info here). But what about all the other payees?
I’ll get into the gory details later but first let’s talk about a couple of general rules that apply to all forms 1099.
PAYMENTS AGGREGATING $600.00 OR MORE IN A YEAR: As a general rule, payments to any entity or individual totaling $600.00 or more in a single year must be reported to IRS on a Form 1099. The type of form 1099 depends on the nature of the payments. There are exceptions to this general rule that I will address in more detail with respect to those types of payments typically made via a real estate settlement transaction.
CORPORATE PAYEES: As a general rule, payees operating as a corporation are not required to be issued a form 1099 for payments received by them. This category includes entities that are, in fact, corporations but also limited liability companies and partnerships that have made an election with IRS to be taxed as a corporation. In addition, state and federally chartered banks are generally considered corporations. EXCEPTION: payments for legal services are reportable, even if made to a corporation. How do you tell if an LLC or partnership has elected to be taxed as a corporation? You should request from the party, especially sellers, that they complete a current Form W-9. Here’s a link to a convenient fillable pdf of the W-9. Download sample W-9 here.
REQUIREMENTS FOR ISSUING FORMS 1099 TO RECIPIENTS OF PAYMENTS FROM A REAL ESTATE SETTLEMENT: Real estate settlement activities should fall under 26CFR §1.6041-1, specifically section (e) Payment made on behalf of another person.
I believe the relevant text is on pages 204-205:
1) In general. A person that makes a payment in the course of its trade or business on behalf of another person is the payor that must make a return of information under this section with respect to that payment if the payment is described in paragraph (a) of this section and, under all the facts and circumstances, that person:
(i) Performs management or oversight functions in connection with the payment (this would exclude, for example, a person who performs mere administrative or ministerial functions such as writing checks at another’s direction); or
(ii) Has a significant economic interest in the payment (i.e., an economic interest that would be compromised if the payment were not made, such as by creation of a mechanic’s lien on property to which the payment relates, or a loss of collateral). (Emphasis added.)
The writers of this code section gave us an example to illustrate:
Example 3. Settlement agent F provides real estate closing services to real estate brokers and agents. F deposits money received from the buyer or lender in an escrow account and makes payments from the account to real estate agents or brokers, appraisers, land surveyors, building inspectors, or similar service providers according to the provisions of the real estate contract and written instructions from the lender. F may also make disbursements pursuant to oral instructions of the seller or purchaser at closing. F is not performing management or oversight functions and does not have a significant economic interest in the payments and is not subject to the information reporting requirements of section 6041. For the rules relating to F’s obligation to report the gross proceeds of the sale, see section 6045(e) and § 1.6045–4. (Emphasis added.)
Given what I believe to be the relevant language in Section 1.6041-1 and the example provided for us, that it would appear that settlement agents generally provide check issuing services for the benefit and at the instructions of others and, therefore, are not subject to the reporting requirements which would otherwise apply.
However, it is my considered opinion that the writers of the code section and the illustrative example cited are not sufficiently informed of the variety of practices engaged in by settlement agents across the country. For example, it’s not uncommon for settlement agents to include in their own fee check funds due to others that will eventually be paid to others from the agent’s operating funds. Does the reporting exemption extend here? Another example: paying fees to government agencies to record deeds, mortgages, releases, etc. pursuant to a particular transaction are, to me, clearly payments made at another’s direction. But, what about those payments, plus fees, paid to e-recording service providers? Does the settlement agent have a significant economic interest in those payments? We’ll examine these and other peculiarities of the settlement process and their effect on IRS information reporting in a future blog post.