Managed rental property: income from late fees. How to report on Schedule E?

Question

We have a rental property that is managed by a property management company. This year, our tenants have paid late fees in addition to the rent. The management company filed these fees under Box 3, 'Other income', in our 1099-MISC for this property.

I am not certain how to correctly report this 'Other income'. It seems like a rent-related payment to me -- so I would assume that this ought to make its way into the net income from that property on Schedule E. However, instructions for this form seem to state that I can only add Box 1 (rent) income from the 1099-MISC to my Schedule E income. There is an item on the Schedule E for 'income not reported on a 1099-MISC', but that doesn't quite describe the situation.

In short: should I be reporting these late fees somewhere in Schedule E, or is there a better place on my tax returns to do so?

Answer 1

Your property management company did this incorrectly. The late fees should be included in Box 1. You should request that they provide a corrected 1099-MISC. Given that they messed that up, you should also verify they are reporting gross rent + late fees not deducting their fees from reported rents.

If they refuse or are unable to issue a corrected 1099-MISC a common approach is to file your return correctly by including the full amount as rental income despite what 1099-MISC says and then explaining it when/if the IRS comes a calling.

The appropriate place for Box 3 income is Line 21 of 1040 Schedule 1. This is taxed normally, not subject to self-employment tax. You could just report it on Schedule 1 and be done with it. If you meet the requirements to benefit from the 20% pass-through deduction (unlikely if you just have the one rental and us a property management company) then you wouldn't want any of your rental income to fall outside of your Schedule E, but if you don't meet those requirements then reporting it on Schedule 1 shouldn't have any impact on your net tax situation.

Personally, I would want the corrected 1099 so I could file as I know it should be. If you do go that route, I'd love to hear their explanation for reporting it as they did.

Edit: It's worth noting that you may not be successful tying to e-file with a disparity in the case of them refusing to correct the 1099.