Property Manager Revenue Reporting

On another forum I browse/read, a tax preparer claimed that gross rents collected by property managers should be reported as revenue on their returns, and everything except the management fee should be backed out as an expense or allowance (e.g. the net rent remitted to the owner, contractors paid on owner's behalf, etc).

I've only had one property manager client in the past, and we started with the management fee as revenue. I think this is the correct way to handle property manger reporting as net rent is generally remitted to owners monthly, net rent belongs to the owners, and PM is merely an agent of the owner. The PM only has rights to the management fee, and there's no accession to wealth regarding anything but the management fee.

Who is correct here?

You.

I agree with you.

As you note, the PM has no title to any funds except those that represent his fee. The receipt of funds above his fee represent a liability to him, not revenue.

While the property manager collects the gross rents on behalf of the property owners and does not actually have any claim to the money, the property manager is the one that receives a 1099-K from various electronic payer systems. If the manager reports income of only 10% of what the 1099-K shows you can be certain he will get some attention from the IRS.

@nilodop Can you please provide a source document that shows that income collected in behalf of agents in non-reportable. CPAJeff mentions that if a 1099-k is received then it is likely that the management company may get attention from the IRS then I would recommend in and out- any thoughts?

Below are what I believe to be the info reporting requirements. I suppose the in and out for 1099K reporting is fine, but I don't do returns. Smeone else is bound to cover that. I have never even seen a 1099K.

§ 1.6041-3 Payments for which no return of information is required under section 6041.******(d) Payments of rent made to rental agents (but the agent is required to report payments of rent to the landlord in accordance with § 1.6041-1(a)(1)(i)(B) and (2)).


§ 1.6041-1 Return of information as to payments of $600 or more. (a) General rule -******(e) Payment made on behalf of another person -*******(5) Examples. The provisions of this paragraph (e) are illustrated by the following examples:******Example 5.
G is a rental agent who manages certain rental property on behalf of property owner H. G finds tenants, arranges leases, collects rent, responds to tenant inquiries regarding maintenance, and hires and makes payments to repairmen. G subtracts her commission and any maintenance payments from rental payments and remits the remainder to H. With respect to payments to repairmen, G is performing management or oversight functions and is subject to the information reporting requirements of section 6041. With respect to the payment of rent to H, G is subject to the information reporting requirements of section 6041 regardless of whether she performs management or oversight functions or has a significant economic interest in the payment. See § 1.6041-3(d) for rules relating to rental agents. See § 1.6041-1(f) to determine the amount that G should report to H as rent.


Box 1. Rents
CAUTION box alerts IRS scanning equipment to ignore the form and proceed to the next one. Your correction will not be entered into IRS records if you check the VOID box.
Enter amounts of $600 or more for all types of rents, such as any of the following.
• Real estate rentals paid for office space. However, you do not have to report these payments on Form 1099-MISC if you paid them to a real estate agent or property manager. But the real estate agent or property manager must use Form 1099-MISC to report the rent paid over to the property owner. See Regulations sections 1.6041-3(d) and 1.6041-1(e)(5), Example 5.

Also, 1.6041-1(f) Amount to be reported when fees, expenses or commissions are deducted -

(1) In general. The amount to be reported as paid to a payee is the amount includible in the gross income of the payee (which in many cases will be the gross amount of the payment or payments before fees, commissions, expenses, or other amounts owed by the payee to another person have been deducted), whether the payment is made jointly or separately to the payee and another person. The Commissioner may, by guidance published in the Internal Revenue Bulletin, illustrate the circumstances under which the gross amount or less than the gross amount may be reported.

So, the bigger property management companies (it seems the ones that know what they're doing) use what's called a trust account to receive rents from tenants and then get money where it's supposed to go. Whether that be to contractors, the PM fee to the PM's operating account, or the net rent to the owner. It's just a sweep account really.

I believe these trust accounts are not setup under the PM's tax ID, and there's good legal reason for a PM to use a trust account in their operations.

Perhaps the reason that the PMs mentioned in this thread are getting 1099ed and have to do the old "in and out" on their returns is because they're using regular business checking accounts tied to their tax IDs, or worse, depositing the money directly into their operating accounts?