Discussion:Agent's commission paid to buyer
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| May 1, 2007 | |
| I have a client that is in the process of buying a house. He said that the broker will give him 4% of the sales commission that the broker will receive from the seller. However, the broker will have to give him a 1099 for this payment and this payment to him will not be reflected in escrow statement. I am assuming that this 1099 will be included in his 2007 income. My question is, should this be treated as other income and reported on line 21? Or is this subject to SE tax? Any reference materials that you could direct me to, as well as any input, will be greatly appreciated. Thanks. | |
Death&Taxes (talk|edits) said: | 1 May 2007 |
| I am assuming this is legal under state law and if so, is this any different from any other seller's discount given at or before settlement? None of those would be income, so why should this? Obviously the seller is desperate to unload the house and the realtor is probably reaching the end of the contract to sell the house. | |
| 1 May 2007 | |
| The problem will come with the 1099-MISC. You will need to show it on the return to avoid a nastygram from the IRS, but then take a deduction against it to show it has been accounted for as a reduction in the basis of the house to the new buyer. | |
| May 1, 2007 | |
| Assuming that it has to be reported in Sch C because it was entered in box 7 (Nonemployee compensation), and take a deduction for the entire amount. Should the deduction be put on other expense and with a description "Reduction in the basis of the house"? Additionally, what type of business will he put in Item A (Schedule C) since he is not self-employed? Lastly, will this "reduction in basis" description raise a red flag with the IRS? Thanks. | |
| 2 May 2007 | |
| Are kickbacks legal anywhere? I can't see reduction in basis. Line 21, ordinary income not subject to SE. Prizes and Awards? ♫ | |
| 3 May 2007 | |
| Agree with Dennis. The rebate from the real estate agent was not a rebate from the seller of the home. This is just a bribe or kickback. | |
| 27 July 2007 | |
| This is not income to the buyer but rather a reduction in the purchase price. The Realtor should not issue a 1099 to the buyer. | |
| 27 July 2007 | |
| Not sure that this is the same fact pattern as the original post. In the PLR, the buyer's agent is writing a check to the buyer, and this would obviously be a reduction of basis. Not sure that you get the same result when the seller's agent writes a check to the buyer. | |
Death&Taxes (talk|edits) said: | 27 July 2007 |
| Very interesting. The PLR does have a different scenario.
Yesterday my son-in-law-to-be went to settlement to buy his first house. Four times in the past two weeks the settlement was canceled because of reasons attributable to the seller. The broker listing the house handled the sale for both sides, and has a written, advertised policy that 'if we don't meet the settlement date, the buyer will receive X dollars.' I have not seen the HUD-1, but apparently this is done by jacking up seller concessions, and in this case, since most the problem arose from a judgment the seller did not disclose, would seem correct. This approach shortcuts the process since broker would go against his seller to collect the additional costs he had to put out, rather than first write a check to the buyer and then collect from seller. But note that this only 'works' if there is enough equity on the seller's side to collect this 'penalty'. | |
| 27 July 2007 | |
| As I understand the original post, the buyer's agent writes a check to the buyer for the portion of the seller's commission which the buyer's agent receives. May be not. | |
| 27 July 2007 | |
| One significant part of the fact pattern in the PLR the rebate is advertised and available to anyone. Makes it more clear that Broker is acting as a vehicle for a Seller's concession. | |
| 27 July 2007 | |
| In the original post, the seller is not giving anything up. Maybe the house has already been reduced in price.
Sounds like the r/e agent has a side deal with the buyer for a kick-back. That's why I always advise my clients to have an atty present to represent your interests when closing. In many states an atty is not required and the r/e agent does all the paperwork. However the r/e agent may not have the same agenda as the buyer or seller. | |
| 23 August 2007 | |
| Real estate rebates are legal in all but about 10 states. In fact, the FTC encourages the practice, saying that disallowing rebates stifles competition and violates antitrust laws. The FTC even went after Kentucky for disallowing the practice, and then Kentucky changed the law to allow real estate rebates. Many big-name online real estate companies and referral companies offer commission rebates to sellers and buyers, so it's definitely legal in most states. (A few states still do disallow the practice, but it's been said that they're worried now that the FTC challenged Kentucky.)
As I read the original post, the seller pays the commission to the agents (which is typical) and then the buyer's agent is giving the buyer a rebate. That being said, how would a real estate brokerage account for a rebate given to a customer on the real estate company's 1120S? How does a company account for rebates? Would you just report income net of rebates, using the reasoning that the rebate is just a return of the buyer's money and was never the brokerage's income? Or would you include it in gross income and then take it out as an expense? Typically, a real estate brokerage would receive the commission, and then they would write a rebate check to the buyer. Because it's a rebate, it seems to me the brokerage is just giving the buyer back the money that belongs to the buyer and that is was never the brokerage's income (and thus would never be included in the brokerage's gross income). What do you think? | |
| 10 March 2008 | |
| Hello. Assume the same fact pattern as the original post, except that the buyer's realtor gave buyer a check at (or after) closing for $8000 of his commission. The realtor was a friend of the buyer. The $8000 was not negotiated beforehand, nor was the home purchase through this realtor contingent upon getting this $8000.
Then, the buyer gets an $8000 1099-Misc (Box 7) the first week of February. My initial thought is this was a housewarming gift, and non-taxable to the recipient. But, there is a 1099 at the IRS office, and my client obviously does not want to undermine or anger the friend who gave her the $8000 (by asking for a corrected/voided 1099, etc.) Do you think we could go the Schedule C in and out "Reduction of Basis" route. Thanks in advance. | |
| March 10, 2008 | |
| 1099 misc from purchase of own house | |
| 2008-03-11 | |
| Belle, where did you get link? it can't be found anywhere on this site. | |
Tx-learner (talk|edits) said: | 11 March 2008 |
| From the original post, I believe that the "kickbacks" was from the RE agent to her buyers, not from seller to buyer, AND, it is legal.
There are many times when RE brokers/agents have "kickbacks" to their buyers. Most cases are for families & friends. As a broker, I gave 1/2 of selling commision to our niece, as a way to help her for closing costs. Most of the time, the title company would add a line in the Netsheet indicated "agent to credit buyers" for a X amount, which then reduced buyers'due at COE. IF the credits weren't done at escrow, then brokers/agents would issue a 1099-misc to buyers at year end. It should go on box 3, and be reported on line 21, 1040. | |
| 11 March 2008 | |
| Careful, state laws (codified rules of State Real Estate Commission or similar body) generally place a limitation on an AGENT's ability to transfer money to any person other than his or her sponsoring BROKER. Most laws allow the broker to enter into the aforementioned arrangement, although many such laws require disclosure of the arranged payment to all parties involved, including the seller of the home in this case. | |
Tx-learner (talk|edits) said: | 11 March 2008 |
| Pcc - you are right! These "kickbacks" must be documented through all channels and involved parties. | |
| March 11, 2008 | |
| Sorry - thought I knew how to link. It's a post I did on March 1, 2008. Maybe try a search for it? | |
| March 11, 2008 | |
| argggghhhhh
Can't make it work. Do an advanced search using quotes around the phrase: 1099 misc from purchase of own house Has answers to my question, and links to other discussions. My case was a buyer who is ALSO a real estate agent. Sorry for mucking up the thread. | |
| March 11, 2008 | |
| One more try - then I'm going home
Jackpot ! | |
| 11 March 2008 | |
| The other discussion referenced above has completely different facts than this one, or the new question I posted above. This is not the owner's own house. The buyer in my scenario did not preform any service for the $8000. | |
| 11 March 2008 | |
| Steve:
In the present case, Taxpayer does not have an information reporting obligation under section 6041 of the Code because, as concluded above, a payment or credit at closing represents an adjustment to the purchase price of the home and generally is not includible in a purchaser’s gross income. Nor does Taxpayer have an information reporting obligation for those amounts under any other section of the Code. I agree with your original ? probably easier to include in return and then state on 'other deductions' as a rebate check from Agent and state as a reduction of basis. | |
| 11 March 2008 | |
| It has nothing to do with the seller. This is income to the buyer, whether its legal or not. Call it a kickback, sweetner, commission, etc...the broker can claim it as an expense, especially if hes 1099ing it. the buyer pickes it up as other income, not subject to s/e. If the buyer is a real estate professional, it should be subject to s/e. | |
| 12 March 2008 | |
| I disagree with Xyzco, buyer should not claim 8k as income. However, since 1099 was issued, Realtor is allowed a deduction, and TP should include as income, since Box 7 was used, file sch C, and under 'other deduction' write a brief statement pertaining to reduction of basis, No SE income, No other income | |
Ken@seamann.com (talk|edits) said: | 13 March 2008 |
| This is done in real estate all the time (especially here in Calif). I always advise 1099Misc Line 3 other income, put in & take out on Line 21 as adjustment to purchase price. | |
| 13 March 2008 | |
| 'Commissions' paid to anyone other than a licensed broker or agent is illegal here in CA. Often the HUD docs will state cash to buyer to pay for closing costs or some such, but that is a concession by the seller, and disclosed in the HUD. What is illegal is the kickback, or commission sharing where the agent kicks back cash to the buyer outside of the HUD. | |
