While I am not a tax expert, I am an attorney as well as a broker that offers rebates to my buyer clients. Rebates are legal and not considered income. I researched this issue for a client a while back and verified that cash back rebates to buyers by their agents are NOT taxable income! See pages 31-32 of IRS Pub. 525 http://(www.irs.gov/pub/irs-pdf/p525.pdf) However, you should consult with professional tax preparer to determine how best to handle the 1098. It is correct that the rebate does lower your basis, which comes into play when figuring capital gains when you sell the property.
Now the bad news. The rebate paid outside escrow may be a violation of the Real Estate Settlement Procedures Act (RESPA). The historical problem associated with rebates in the real estate industry is one of kickbacks to other businesses, such as providing a kickback to a title company or another business to direct business a certain way. Through kickbacks, some agents were able to corner the market and prevent competition. This has been made illegal in all states through RESPA. With regard to commission rebates to buyers, the issue is one of disclosure.
According to the DOJ and the Department of Housing and Urban Development (HUD), real estate agents may rebate a portion of the agent’s commission under RESPA. The rebate must be listed as a credit on page 1 of the HUD-1 in Lines 204-209 and the name of the party giving the credit must be identified. Real estate agent or broker commission rebates do NOT violate Section 8 of RESPA as long as no part of the commission rebate is tied to a referral of business.
When I send my commission demand to escrow, I instruct the escrow officer to credit from my commission whatever my stated rebate is, usually 1% of the purchase price, toward the buyer's recurring/non-recurring closing costs. I have never had a problem since implementing this policy and no bank or seller has ever questioned the credit.
I hope this helps.
Cappy D. Myers, DRE 01767062
TIMELINE Real Estate Services, Inc.
1999 S. Bascom Avenue, Ste. 700
Campbell, CA 95008
I was waiting for attorney Cappy Myers to respond before writing because, to my knowledge, he and I were one of the first real estate professionals to work on either "fixed fee" or "1%" commission deals. Back when we first started doing this, the real estate industry wasn't as progressive, so the only caveat was that the buyer and the seller had to informed of the credit. When I tried, as I did several times in the beginning, to report this on the HUD closing statement, no one--title companies or mortgage lenders--knew how to handle it.
Now, everyone from the Federal Department of Justice (DOJ) and Housing and Urban Development (HUD) think that commission rebates are a "great way" to stimulate the economy. And the rules or procedures regarding how to handle commission rebates are getting more 'clear." Where we tend to run into problems, however, seems to occur most often with lenders and when the rebates, exceed costs. So here's the two ways that I rebate money to clients:
1. Reduce the purchase price of the home by the commission rebate - The commission rebate is noted on an addendum that both buyer and seller will sign. I do this most often because my rebates can be as much as 2% of the sales commission; or
2. Show the rebate on the HUD in lines 204-209, as stated earlier by Cappy. To do this, of course, the rebate should be noted in an addendum to the purchase agreement (again, so that all parties--including the buyer's lender) knows about the rebate, who it's coming from and who it's going to. Because my rebates to owners can be quite large (2 percent of the purchase price for some buyers), many of the banks (B of A, Wells Fargo for instance), don't like it. This is especially problematic when the amount of the rebate begins to affect the down payment by the buyer.
There are specific exceptions to rebates and that is that most FHA lenders will not allow the buyer to obtain a rebate. Also, there are instances in short sales and REO purchases where a rebate reduction will not be allowed by the bank.
As Cappy noted, there are certain rules regarding how the money must be handled and rebated and how it must appear on the HUD. One more thing, I do also require that my buyers sign buyer/broker agreements where the amount of my commission is specified and the box is marked that excess commissions will be rebated to the homeowner. Also, if your agent is the employee of a broker, the rebate should have come from the broker and NOT from the agent, which is why I suspect that the agent sent you a 1098. Agents need to get the broker's approval before offering rebates, and I know many of the larger real estate brokerages do not allow rebates as a matter of policy or because it is presumed that such actions "damage" the brand, and these are certainly legitimate issues.
At this time, the 1098 or 1099 that was issued to you should be explained by other paperwork that you may have from the broker such as the Buyer Broker Agreement or, in the case of our company, a rebate disclosure form. Otherwise, it will be hard to provide from the document trail what this rebate was and why it was paid to you by the agent. Work with your CPA and the real estate agent to settle this matter.
Area Pro Realty
Don't let all the naysayers try to scare you. Every time rebates are brought up here all the talking heads come out to tell you that it's fraud, coercion, violation etc. In California it is perfectly legal for an agent to share their commission with a client. It does need to be disclosed and your lender should be aware of it. However, if you are doing a conventional loan with at least 20% down, your lender doesn't care. If it's an FHA loan no money should change hands outside of escrow.
Yes, if you're not a broker then you have to get your broker's permission.
The naysayers here have a vested interest in spreading false information to preserve the 6% commission. Happens every time the subject is broached.
Congrats on getting a good deal!!! I'm sure you're happy to the tune of several thousand dollars.
As to Angela White's argument....I've seen Agents that made no commission at all (volunteers) and do excellent work. I have also seen the top producing outfits in my town consistently make millions collecting so called full commissions while at the same time pulling the wool over the consumer's eyes making them think they were getting the best representation while the Broker's basic business models are designed to maximize profits while putting their clients at risk. Most Seller's and Buyer's do not understand Agency Relationships and many Brokers like it that way. So my argument here is... that no one can look at a commission amount and determine what kind of representation a real estate Client is going to receive. In my case, I work with very informed Buyers that usually know the market better than I do. They hire me to do specific work for them. Their level of representation never goes down. The amount of service I give reflects what I charge them. Takes less time....I charge less money....real simple. I'm happy...they're happy. This is the future of real estate....consumers are getting hip to this old school real estate crap that the big outfits are still trying to pull. THE GATE KEEPERS. We as Agents have the obligation to help the consumer understand that they are the bosses and don't have to cower to us anymore. Walk through those gates....those chains and locks that you see on them....they are an illusion! Stuart
According to our accountant the IRS has ruled that commission rebates are viewed as reductions in price rather than income. Your agent probably sent you the form so as to take it off her income. Check with your accountant.
Lance King/Owner-Managing Broker
The IRS actually uses a copy of the same letter it sent to Redfin on it's own website to address the issue.
All the best to you.
yes, the commission rebate is perfectly legal in California,
and the commission rebate may or may not be taxable to you depending on your specific situation...how much is given, is it fully offset by any credits given to you at close of escrow, is any portion of it given after escrow closes, and so on...(make sure you get your Tax Accountants opinion)....
Buyer 50%-60% Cash Rebate
Seller 50% Commission Discount
I just checked with a cpa and you should do so also, because as real estate agents we are not tax experts. He told me that this is NOT a taxable event ( his words) so I would do as cappi suggested and contact your agents broker and get him to pull it ( after YOU check with a cpa).
At your service,
After doing some research on this important issue, I learned the following and must add to my previous post. I believe that the 1099-MISC was made in error and could adversely affect the client's taxes by convincing them they must pay taxes on the rebate or cause the client to be audited. I must assume that a 1099-MISC was issued rather than a 1098 as a 1098 is something entirely different and would not apply in this situation. I found that the IRS issued an opinion letter in February 2007 on this very issue at the request of a large real estate firm that offers rebates. The IRS's conclusions of law are as follows:
FACTS (Paraphrased): A buyer purchased a home through a broker who sent the buyer a check rebating a portion of the commission earned, which was paid by the seller in the normal course of business and per local MLS rules. The buyer's agent was an exclusive agency. The questions raised are: 1) Is the rebate taxable income; and, 2) Must the broker providing the rebate issue a 1099 to the buyer?
ISSUE 1: Payments (Rebates) or Credits are Not Taxable Income
Section 61 of the Internal Revenue Code (Code) provides that, except as otherwise provided, gross income means all income from whatever source derived.
Situation 2 of Rev. Rul. 2006-27, 2006-21 I.R.B. 915, involves a nonprofit corporation that provides down payment assistance towards the purchase of homes to low-income individuals and families. The ruling holds that down payment assistance received by a home purchaser represents a rebate or an adjustment to the purchase price, and, as such, is not included in a purchaser's gross income.
Rev.Rul. 76-96, 1976-1 C.B. 23, as modified by Rev.Rul. 2005-28, 2005-1 C.B. 997, involves a manufacturer of automobiles that paid rebates to its retail customers who purchased or leased new automobiles. The ruling holds that a rebate is not to be included in a customer's gross income; but rather, represents an adjustment to the purchase price of the automobile.
In the present case, a payment or credit at [or after] closing from the [broker] represents an adjustment to the purchase price of the home and generally is not includible in a purchaser's gross income.
ISSUE 2: Information Reporting Obligations
Section 6041 of the Code requires all persons engaged in a trade or business and making payment in the course of such trade or business to another person, of rent, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable gains, profits, and income of $600 or more in any taxable year, to file an information return with the Internal Revenue Service and to furnish an information statement to the payee.
Section 1.6041-1(a)(2) of the Income Tax Regulations provides that the return required by section 6041(a) of the Code is made on Forms 1096 and 1099. Section 1.6041-1(c) provides that payments are fixed when they are paid in amounts definitely pre-determined. Income is determinable whenever there is a basis of calculation by which the amount to be paid may be ascertained.
A payor generally is not required to make a return under section 6041 of the Code for payments that are not includible in the recipient's income. nor is a payor required to make a return if the payor does not have a basis to determine the amount of a payment that is required to be included in the recipient's income.
In the present case, [broker] does not have an information reporting obligation under section 6041 of the Code because, as concluded above, a payment (rebate) or credit at [or after] closing represents an adjustment to the purchase price of the home and generally is not includible in a purchaser's gross income. Nor does [the broker] have an information reporting obligation for those amounts under any other section of the Code.
In conclusion, real estate agent rebates are not taxable income and any agent that provides them should not be filing any IRS reporting forms. I suggest to any buyer who receives a 1099, or any other IRS form, that seems to identify a rebate received as income to immediately send a letter to the broker demanding that form be withdrawn or corrected. The broker, when preparing their taxes, should be deducting the rebates from their gross income.
Cappy D. Myers, DRE 01767062
TIMELINE Real Estate Services, Inc.
1999 S. Bascom Avenue, Ste. 700
Campbell, CA 95008
Congratulations on your purchase. There are two things to think about here. 1st, yes, your rebate was taxable and your agent did the correct event on that action. If you don't claim it as income and try and ignore it, it will come up as an audit item almost guaranteed. This is the biggest item for audit - unclaimed income- and that's what the IRS views that money.
2nd, if it wasn't on the HUD, depending upon the loan you received, it could be construed as lender fraud. The lender has the right to know all aspects of the transaction (that's why there is a HUD) and it must be declared as information that is pertinent to the transaction. From a legal standpoint money paid to you as an incentive to purchase can be construed as coersion. Real Estate agents are not allowed to participate in coersion. Did this agent also recommend you go through a certain lender? I would wonder then about your loan rate, loan costs and any kickbacks the lender may have given to the real estate agent. You have to ask yourself, if the agent was willing to give you money back under the lender's table, then what else were they willing to do. Personally I think if an agent is willing to give up their hard earned commission to represent you for the best possible price and terms then perhaps it was more important that to them that the deal go through than you actually getting the best possible service out of them. Just a thought. Your agent may have done the best they could to secure the best possible scenario for you, but then again, they are freely giving back their hard earned dollars, what do you think they may have done with your hard earned dollars. Just a thought. As a real estate professional I hire the people that protect my best interest. Period. Its the way I do business. As you can see, your $5000 kickback was really only $3000 and then $3000 saved on a compromised deal suggests, did you really save that $3000 afterall? Hope you got inspections and they were interpretted correctly. Hope you bought the best possible investment for you, But you won't know till something comes up. Let's hope this is your only surprise the agent didn't tell you about, and that it is not followed by others.
I am assuming you got a 1099. And yes, the money that you got from your Realtor is considered income and if that amount is in excess of $600, it has to be reported to IRS. I would recommend checking with an accountant or directly with IRS.
I know this an old thread but there is some good info here and just wanted to verify a few things. I'm assisting my clients (friends) purchase their first home. I would like to give them a portion of my commission to help them out. It sounds like I have a couple of options:
My brokerage said that I can rebate a portion of my commission. They said that they will mail my client a check after the closing as long as I filled out a fee disbursement form detailing how much and who gets what. They said that I will not be taxed on the rebate portion.
Cappy mentions, "According to the DOJ and the Department of Housing and Urban Development (HUD), real estate agents may rebate a portion of the agent’s commission under RESPA. The rebate must be listed as a credit on page 1 of the HUD-1 in Lines 204-209 and the name of the party giving the credit must be identified. Real estate agent or broker commission rebates do NOT violate Section 8 of RESPA as long as no part of the commission rebate is tied to a referral of business."
Does anything need to be filled out on the HUD if an actual check is being mailed to my clients rather than being a credit? Sounds like they won't be taxed if it's a credit, but what about if they receive a check?
Grace mentions, "Reduce the purchase price of the home by the commission rebate - The commission rebate is noted on an addendum that both buyer and seller will sign. I do this most often because my rebates can be as much as 2% of the sales commission."
If I want to give my clients 3K, reducing the purchase price of the home by 3K affects the commission of the listing agent (who won't be happy). How does this work?
You were sent the wrong form and it is not taxable.
Your agent should withdraw the form.
You need to get an accountant and let the accountant get in touch with your agent.
The issue of rebates and tax responsibility can be interpreted differently by the IRS depending on the situation. This is why the IRS has tax audits and auditors to determine the tax ability of certain amounts and types of income.
Again, prompt and professional attention by a Certified Public Accountant is imperative.
Confer with your CPA
Lynn911 Dallas Realtor & Consultant, Loan Officer, Credit Repair Advisor
The Michael Group - Dallas Business Journal Top Ranked Realtors