Tax on Real Estate Commission Rebate?

As it has been agreed to in advance, the rebate should be reflected on the Hud-1 statement. There was a private letter ruling on this subject that said it is a reduction in the purchase price and that there was no reporting requirement (i.e., no 1099 should be issued.)

Here's part of the summary from the letter ruling that says there is no income and no reporting requirement:

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.

Note that private letter rulings may not be cited or used as precedent by any other taxpayer. However, as this ruling is on point, it provides you with information on how the IRS would interpret any transaction that has the same set of facts.

The discount broker may think they need to issue a 1099-MISC to help substantiate an expense deduction, but as stated this is not the case.

On their side of the transaction, the broker should be showing this as a "return or allowance" that offsets their gross receipt for the transaction on the Schedule C, not as an expense.

-Mark Bole

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Thanks for the great reference. In this particular case the rebate will not appear on the HUD closing statement. I think that the buyer's broker's commission generally doesn't appear on the HUD (the full unsplit commission is shown as payable to the listing broker). There may be other reasons why the discount buyer's broker needs to do it this way (I think I read in some states there have been lawsuits arising from realtor associations trying to block these types of discounts and the discounters suing based on anti-trust laws). Strangely, in the "Letter" two cases are presented (1st paragraph on page 2), after "one or two ways ..."; however, from my reading, it seems that the only the 2nd "way" is addressed in the letter (when the rebate is deducted at closing), the 1st "way" , which exactly fits my case, seems to be ignored.

Does the letter address the 1st "way" ?

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Did you miss the part that said:

"Issue 1 ? Payments or Credits are Not Taxable Income"

Wasn't Payments the first way and Credits, the second way?

"Thunderbird" wrote

Well, we haven't learned a dang thing. What you have done is jack up the sales cost for money you are getting back. The house cost you $X less the rebate to you. You have caused the county tax assessor to look at that house closing price at the higher gross and bump up the value to that. In addition as often as that closing is used as a comp, you jack up the surrounding property values for tax and other purposes.

Yet, the house was worth the listed price LESS the rebate amount (the net of what you paid for it).

It does. It always does for all financial items paid for with regard to that closing.

What's not shown are "off the books" deals - like this one is. If you don't tell the closing attorney about your deal, it's not on the HUD-1.

I'm not going to say I'm shocked that these types of things are making a comeback.

No lesson learned after trillions in losses in real estate.

I'm stumped by Paul T's rant. It's actually the normal real estate broker is the one who's behavior is more suspect. If a house is listed with a 6% commission (MLS with a 50% split) and a buyer or their broker asks the listing broker to reduce the commission to the seller by let's say 1%, and then split the commision 3% / 2% (so the selling broker is not giving up anything and everything will be on the HUD-1) they will generally balk at this idea (at least in my state). I'm not sure why (I can only guess), but that's the way it is. Personally I had a previously experience where I had no buyer's broker and made an offer for property directly to the listing brokerage and asked that they reduce their commission to the seller given that they will not have to split the commission as is usual and they refused. I found out later that this is normal.

There's nothing illegal or unethical of what this discount broker is doing, it is just non-standard and therefore brings up the tax question I submitted. If you want to blame someone for creating this business model and the effect it has on appraisal values, blame the run-of-the mill realtor and their clique of so called "competitors" who do their best to protect the golden rule of a fixed 5 or 6% commission.

It may be normal, but if they did not present the offer to the seller, they have an ethical violation on their hands.

If the broker is a REALTORS®, his own professional association recommends that he make full disclosure and show the rebate on the HUD Settlement Statement

Doing it the "non-standard" way gives the transaction the appearance of impropriety - never a good thing in tax issues.

(snipped just a little bit.....)

AND the rebate is still not properly reported on a 1099misc to IRS or the payee, since it doesn't meet IRS criteria for such reporting.

ChEAr$, Harlan Lunsford, EA n LA