Form 1099-K: New Rules, Old Problems for Expats with Foreign Rentals

The Form 1099-K has been a source of confusion and frustration for taxpayers over the past few years - especially for US expats managing rental properties abroad. While recent legislative changes have brought welcome relief for most taxpayers, international property owners still face significant compliance challenges that can trigger IRS audits and penalties.

In this article, we'll break down what Form 1099-K is, how the reporting thresholds have changed, and most importantly, how to avoid IRS problems if you're renting foreign property through platforms like Airbnb or VRBO.

What Is Form 1099-K?

Form 1099-K is an information return filed by third-party payment processors - companies like PayPal, Venmo, Cash App, Stripe, Airbnb, and VRBO. Similar to other 1099 forms you may be familiar with (like the 1099-NEC for independent contractors or 1099-B for investment transactions), the 1099-K reports payment transactions to both the taxpayer and the IRS.

The purpose is straightforward: these payment processors send one copy of the form to you and another to the IRS, creating a paper trail that helps ensure you're reporting all your income correctly.

Important clarification: Just because you use a payment processor like Venmo or Cash App doesn't automatically mean you're running a business. You might simply be splitting dinner costs with friends or reimbursing someone for concert tickets. The form itself doesn't determine whether you have taxable income - but it does create a matching requirement with the IRS.

The Whiplash of Changing Thresholds

The Original Rule: $20,000 and 200 Transactions

Prior to 2022, third-party payment processors were only required to issue a Form 1099-K if your transactions with that specific processor exceeded both $20,000 in gross payments and 200 separate transactions during the calendar year.

This relatively high threshold meant that casual users of payment apps rarely received these forms. The reporting requirement primarily affected legitimate businesses and active rental property owners - which made sense.

The 2022 Shock: Dropping to $600

Then came the American Rescue Plan Act of 2021, which changed everything. Effective for the 2022 tax year, Congress slashed the reporting threshold from $20,000 down to just $600 - and eliminated the 200-transaction requirement entirely.

The reaction was immediate and intense. Suddenly, millions of Americans who had never run a business in their lives were potentially subject to 1099-K reporting. A few Venmo transactions for dinner parties, splitting vacation costs, or selling used items could trigger a form - and with it, potential IRS scrutiny.

The administrative burden was staggering, not just for taxpayers, but for payment processors and the IRS itself. The matching notices, explanations, and documentation required to reconcile non-business transactions would have created chaos across the tax system.

The Phased Approach (That Never Happened)

Recognizing the problem, the IRS announced a phased implementation:

• 2024: Threshold of $5,000
• 2025: Threshold of $2,500
• Eventually reaching $600 over subsequent years

This was better than an immediate drop to $600, but still problematic. The trajectory remained concerning for anyone using payment apps for personal transactions.

The One Big Beautiful Bill Act: Back to $20,000

In 2025, the "One Big Beautiful Bill Act" reversed course entirely. Effective January 1, 2025, the reporting threshold returned to $20,000 in gross payments.

This legislative u-turn was welcome news for most taxpayers. Casual users of payment platforms no longer need to worry about receiving 1099-K forms for personal transactions.

But Expats Still Have a Problem

Here's where things get complicated for international taxpayers - and why I'm writing this article.

Even under the old $20,000 threshold, I've seen countless US expats with foreign rental properties receive IRS audit notices and penalties related to Form 1099-K reporting.

The problem isn't the threshold amount. The problem is a structural mismatch in how foreign rental income gets reported when you use platforms like Airbnb or VRBO.

The Foreign Rental Property Trap

Let me walk through a typical scenario that creates this issue:

Step 1: You Structure Your Foreign Real Estate Properly

You purchase a rental property in Costa Rica (or Portugal, Mexico, Spain - the country doesn't matter for this issue). Following sound tax planning advice, you hold the property through a Costa Rican SRL (Sociedad de Responsabilidad Limitada), which is Costa Rica's version of a limited liability company.

From a US tax perspective, this foreign LLC defaults to being treated as a foreign corporation - a separate taxpayer distinct from you personally. Note that this is not generally the recommended approach for structuring but let’s assume this person did not get good international tax advice and is now stuck in foreign corporation world (...this happens alot).

This means:

• The rental income and expenses belong to the corporation, not to you individually
• You report the corporation's financial information on Form 5471 (Information Return of U.S. Persons With Respect to Certain Foreign Corporations)
• Depending on the income type and various anti-deferral rules (Subpart F, GILTI), you may or may not have to pick up that income on your personal return
• The regular rental income and expenses do not flow through to your personal Form 1040

So far, this is proper tax structuring for foreign real estate.

Step 2: You List the Property on Airbnb

Now you want to rent out this property. Naturally, you create an Airbnb (or VRBO) account to list it and manage bookings.

Here's the problem: People will often set themselves up as the account holder and not the Costa Rican SRL. What you should do is set the Airbnb account up in the company’s name since it is the beneficial owner of the income but people often miss this. It can be confusing to navigate in the system and some people may already have an account and don't want to set up a whole new one.

Whatever the reason, you set up your Airbnb host account as yourself, a US citizen.

Step 3: The Income Flows In

Throughout the year, guests book your property. The rental income accumulates. If you're actively renting a property year-round, hitting $40,000 in gross receipts isn't difficult at all - especially if you're in a desirable location with strong short-term rental demand.

Step 4: Year-End Reporting Creates the Mismatch

At the end of the tax year:

What Airbnb does:

• Issues a Form 1099-K under your name and Social Security Number showing $40,000 in payment transactions
• Sends a copy to you
• Sends a copy to the IRS

What you do (correctly):

• Report the rental income and expenses on Form 5471 as belonging to your foreign corporation
• Do not report this rental activity on your personal Form 1040 (because it belongs to the corporation, not you personally)

What the IRS computer sees:

• A 1099-K showing $40,000 in income under your SSN
• A Form 1040 with no corresponding rental income reported
• MISMATCH

Step 5: The IRS Notice Arrives

Because the IRS automated matching system sees income reported on a 1099-K that doesn't appear on your tax return, it triggers a notice - or worse, an audit.

You may receive:

• CP2000 Notice: Proposed changes to your tax return based on unreported income
• Penalties for underreporting income
• Interest on the proposed tax owed
• Requests for additional documentation and explanation

And now you're stuck defending yourself against a penalty that resulted from correct tax reporting - just not in the format the IRS matching system expected.

The Solution: Satisfy the IRS Matching System

The key to avoiding this problem is understanding that you need to satisfy two separate requirements:

1. Correct substantive tax treatment (reporting the income where it legally belongs)
2. IRS information return matching (making sure 1099-K income appears somewhere on your return)

Here's the practical solution I use for clients in this situation:

Report the Income on Schedule E

Even though the rental income substantively belongs to your foreign corporation, you need to create a matching entry on your personal tax return (Form 1040) to correspond with the 1099-K.

The appropriate place to do this is Schedule E (Supplemental Income and Loss), which is the standard form for reporting rental real estate income and expenses.

On Schedule E, you would:

• Report the gross rental income that matches the amount shown on Form 1099-K
• Immediately back out that same amount as an offsetting expense or adjustment

This creates a net zero effect on your personal tax return - no income is actually being taxed at the individual level.

Add a Clear Statement of Explanation

I typically attach a statement to the tax return explaining what we're doing:

"The rental income reported on Schedule E corresponds to Form 1099-K issued by Airbnb for rental activity conducted through [Foreign Corporation Name]. This income is properly reported on Form 5471 as belonging to the foreign corporation. The Schedule E entry is included solely to satisfy IRS information return matching requirements and has been offset to avoid double taxation."

Full transparency: I'm not entirely convinced the IRS actually reads these explanatory statements. But including one provides an additional layer of documentation and demonstrates good faith compliance if the return is ever examined.

Continue Reporting Correctly on Form 5471

After satisfying the matching requirement on your 1040, you continue reporting the rental activity exactly as you should on Form 5471 - as income and expenses of the foreign corporation.

This is where the substantive tax treatment happens. Depending on the type of income and various anti-deferral provisions, you may need to include some of this income on your personal return through Subpart F or GILTI calculations - but that's a separate analysis from the 1099-K matching issue.

Why This Workaround Is Necessary

Is this elegant? No.

Is it frustrating to have to report the same income in two different places just to avoid IRS penalties? Absolutely.

But until the IRS updates its information return matching systems to recognize these cross-border structures, or until platforms like Airbnb allow entity-level account registration, this is the practical reality.

The alternative - not creating a matching entry - results in real penalties, real interest charges, and real time spent responding to IRS notices.

I've seen the consequences firsthand with clients who filed their returns correctly from a technical standpoint but didn't account for the matching issue. The resulting notices, documentation requests, and penalty assessments are far more burdensome than simply creating the offsetting Schedule E entry in the first place.

Other Considerations for Foreign Rental Properties

While we're on the topic of foreign rental real estate, it's worth noting a few related issues:

Short-Term Rental Tax Benefits

If you're actively managing a short-term rental property abroad, you may qualify for significant tax benefits that aren't available for traditional long-term rentals. The key is meeting the IRS requirements for "material participation" in a rental activity.

We've covered this topic in depth in other articles and videos - it's one of the most powerful planning opportunities for expats with rental properties.

Entity Structure Matters

Whether you hold foreign property directly, through a disregarded entity, or through a foreign corporation has major implications for:

• US tax reporting complexity
• Local country tax treatment
• Liability protection
• Estate planning
• Exit strategies

The "right" structure depends on your specific situation, the country where the property is located, your long-term plans, and your overall tax profile.

Form 5471 Compliance Is Critical

If you do hold property through a foreign corporation, Form 5471 compliance is non-negotiable. The penalties for failure to file - or filing incorrectly - start at $10,000 per form, per year, and can increase significantly if the IRS determines the failure was willful.

This is specialized reporting that requires careful attention to detail and deep knowledge of the foreign corporation reporting rules.

The Bottom Line

The "One Big Beautiful Bill Act" restored the 1099-K threshold to $20,000, which is good news for the vast majority of taxpayers using payment apps for personal transactions.

But if you're a US expat with foreign rental property held through a foreign corporation, the old problems remain.

To avoid IRS notices and penalties:

1. Recognize that Airbnb will issue a 1099-K under your personal SSN
2. Create a matching entry on Schedule E of your Form 1040
3. Offset that entry so it has no net tax effect
4. Continue reporting the rental activity correctly on Form 5471
5. Consider including an explanatory statement

This approach satisfies the IRS matching requirement while maintaining proper substantive tax treatment.

Need Help With Foreign Rental Property Reporting?

If you're managing rental property abroad - or considering purchasing foreign real estate - getting the tax structure and reporting right from the beginning can save you significant time, money, and stress down the road.

At McGowin Tax, we specialize in helping US expats and international investors navigate exactly these types of cross-border tax issues. From initial structuring advice to ongoing compliance and IRS representation, we provide practical solutions backed by deep international tax expertise.