Commission used to lower purchase price.

Usually not a good idea to let the tax tail wag the dog...looking at the bigger picture, does the purchase for cash make sense, given the current state of the home-ownership market, historically low mortgage rates, and prospects for inflation down the road?

Are you talking about a commission on *selling* the primary residence, or *purchasing* the condo? And out of curiosity, are they going to re-convert the rental they have moved into back into a rental after it is no longer their primary residence? (the new non-qualified use rules might come into play if/when they finally sell it).

Are we talking a cash-basis or accrual-basis taxpayer here? P&I would only apply if tax on taxable income was not paid on time.

We will take your word for it! ;-)

-Mark Bole

I brought that up too. It went in one ear and out the other.

The commission is on the condo purchase in South Carolina. He has a real estate license in Maryland, but he purchased and sold rentals - FSBO. Which is how he is selling his primary residence. He's planning to sell this last rental unit that way too.

We're talking about $10-20K an he wnats to avoid taxes completely.

Dick

Personally I'd just call it a rebate or reduction in price, because that is, in effect, what it is. I haven't researched the issue, though, so you never know what the IRS might say.

Sty

I don't know how real estate transactions/closings are handled in SC, but presumably there would be some kind of closing statement from escrow or from a law firm or whatever. In California it would go through escrow and if there was a commission it would appear on the buyer's closing statement and she would get a check. It certainly would be income to her.

It just seems to me that if there is some kind of closing statement, and she is entitled to a commission, the purchase price would be shown gross and the commission would be a separate line item as an expense of the purchase. In which case it's income to her. Now if you can get the closing statement to show the purchase price net of the commission, and not show the commission at all, it would just be a reduction of the purchase price. At least there would be no documented evidence that she received a commission. Unless somebody issues her a 1099!

Katie in San Diego

It's not unknown for a real estate agent to rebate (part of) the commission to the buyer. That amount ceases to be income (or is a deductible expense). So if she were to rebate the payment to herself, it's no longer taxable income.

I don't see why that statement is definitive. It's a case of form over substance, and here the substance is "An hour ago, I had $100,000 and no house. Now I have $3,000 and a house. Therefore, I paid $97,000 for the house."

Seth

If she were the seller there would be no question. But since she's the buyer and the seller is paying the commission, technically Katie is right.

Except the reason she has that $3000 is not because the seller gave it to her, but because the seller's broker paid it to her as a split of total commission.

In a sense it's a close case, and I agree that in reality it's a reduction of the purchase price. But if the closing documents show a commission payment to the buyer, and a 1099 is given to her, it could be difficult to convince the IRS that is how it should be taxed.

Stu

I've never seen a HUD statement that actually lists the name of the agent, rather than the agency/brokerage they work for. And a lot of times, only the selling agency is listed, and the buyer agent's agency collects their money from the seller's agency, rather than from the funds at closing. The broker then cuts a check to the buyer's agent.

So I think the broker can easily characterize a payment to the agent as a rebate of commission (especially if you had an agreement in place beforehand), and as long as it doesn't show up on the 1099 I don't see a problem. It makes no sense to pay yourself a commission from your own money.

Just don't forget to lower the basis.

I've done deals where the price was lowered by the buyer's share of the commission, so the seller agent received 100% of the smaller commission. Then it is totally not an issue. That's tougher to do these days, especially with foreclosures, because the banks don't want to deal with anything out of the ordinary.