The 1099-MISC form helps the IRS track freelance income. If a business owner pays a non-employee more than $600 over the course of a year, he sends the worker and the IRS a 1099. That makes it harder for freelancers to hide income. If a homeowner, hires a contractor -- to build your dream home, for instance -- you don't provide a 1099.
Landlords
In 2010, tax rules changed for people who rented out property. Under the 2010 Small Business Jobs Act, if you made money from a rental, you had to submit a 1099-MISC for anyone to whom you paid more than $600 for services. Congress repealed that rule in 2011. Anyone working as a real-estate professional still has to use a 1099 to report services to his business; someone who rents out a garage apartment, however, needn't bother.
Paperwork
Even though you're off the hook for a 1099, you should use other paperwork to document your dealings with your contractor. If you pay a contractor to build your house, for example, the cost is your "basis" in the home. When you sell, you subtract the basis from the sale price to figure the taxable capital gains on the sale. Records of what you spent will prove you're reporting capital gains honestly.
Improvements
If your contractor makes improvements -- a new roof or an added bedroom, for instance -- you add those to your basis. For example, if your basis in the house is $200,000 and you sell for $260,000, your gain is $60,000. If you paid $10,000 for a kitchen remodel, your basis is $210,000 and your gain is $50,000. You need to keep records and contracts to prove the value of your improvements, just like the construction cost of your house.
Record-Keeping
Keep records of what you paid your contractors as long as you own the house. That includes both records of the original construction costs and payments to the contractor, and receipts for any improvements or additions that affect the basis. The IRS recommends you also save any worksheets you use to figure your capital gains tax when you sell. Hang on to the paperwork for three years after you sell the house. After that, the statute of limitations makes it unlikely that the IRS will audit you.
