Real estate agent buyer rebate tax

[raj18]

My real estate agent agreed to split the commission for the property i bought but somehow it was missed to be included to reduce the closing costs. For the commission being paid back to me, he wanted to deduct the tax as the whole commission was paid to him and said he has to pay the tax on entire commission. My agents CPA says paying back after closing could be illegal.  I showed them https://ttlc.intuit.com/community/taxes/discussion/tax-reporting-for-commission-rebates-in-today-s-d.... Wanted to get advice from turbo tax community on

- If the commission paid back from buyer agent to buyer is taxable for the buyer agent?

- If commission being paid back to buyer is considered a kick back in washington state.

[Mike9241]

see a lawyer. what's an illegal kickback is a matter of state law - not income tax laws. 

[Opus 17]

From the real estate agent’s point of view, federal tax law would allow them to deduct their ordinary and necessary business expenses before calculating their income tax bill for the year. If rebating part of the commission is an accepted and ordinary business practice in your area, then it would be deductible as an ordinary business expense and there is no reason for the real estate agent to pay income tax on the amount that was rebated to you.

In fact, when I purchased my new home after relocating for work, I participated in an arrangement where, if I used my employer’s preferred real estate agent, the agent would rebate me a portion of the commission, and this occurred by check 30 days after the closing. It was certainly not illegal in my state, and it does not require that the real estate agent pay income tax on the full commission, because the rebate is deductible to them as a business expense.

If you have a contract in writing that says the agent must pay you a certain amount, that should be enforceable, as long as the arrangement is legal in your state. The agent will not be out any tax money by paying you the full amount, if they have their taxes prepared by a competent preparer.  If the agent refuses to honor their contract, you may want to contact the real estate licensing board in your state. If the agent offered you a contract with illegal terms, you may also want to contact the state real estate licensing board.

[tagteam]

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@raj18 wrote:

- If the commission paid back from buyer agent to buyer is taxable for the buyer agent?

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No. For federal income tax purposes the rebate will reduce your cost basis (as the buyer) in the property and the rebate would be deductible for the agent.

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@raj18 wrote:

- If commission being paid back to buyer is considered a kick back in washington state.

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It is in a handful of states, but I do not believe that is the case in the State of Washington. You can contact the Real Estate Commission and inquire.

See https://www.dol.wa.gov/business/realestate/consumernews.html

[raj18]

Thanks for the answers!

[TomD8]

@tagteam 's answer is correct.  Another wrinkle to this situation is that the rebate amount is not taxable income to the buyer - a question that sometimes comes up.  And a 1099-MISC should not be issued to the buyer for the rebate amount.

Also, the full amount of the commission is definitely taxable to the real estate agent.  The agent cannot deduct the rebate amount unless he/she has paid taxes on the full commission amount.

[Opus 17]

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@TomD8 wrote:

Also, the full amount of the commission is definitely taxable to the real estate agent.  The agent cannot deduct the rebate amount unless he/she has paid taxes on the full commission amount.

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I don't understand your logic here.  Consider two situations.

1. Buyers' agent agrees to a 2% commission on a $100,000 purchase and receives $2000 at the closing.

2. Buyers' agent agrees to a 2% commission on a $100,000 purchase, receives $3000 at the closing and rebates $1000 to the buyer.

In case 1, the agent reports $2000 gross income on schedule C.  In case 2, the agent reports $3000 of gross income and $1000 of expenses for net income of $2000.  Either way, the agent pays income tax on $2000 of net income. 

[TomD8]

Regardless of the commission percentage, the full commission amount is included in agent's gross income on Schedule C.  Rebate amount is then deducted, along with agent's other business expenses.

Agent's net profit on Schedule C goes to agent's Schedule 1 (Form 1040) and Schedule SE.

[Opus 17]

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@TomD8 wrote:

Regardless of the commission percentage, the full commission amount is included in agent's gross income on Schedule C.  Rebate amount is then deducted, along with agent's other business expenses.

Agent's net profit on Schedule C goes to agent's Schedule 1 (Form 1040) and Schedule SE.

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Yes, which is what I originally said.  Thus, the agent can't use "taxes" as an excuse to fail to pay the full agreed-upon amount. 

[TomD8]

@Opus 17 wrote "there is no reason for the real estate agent to pay income tax on the amount that was rebated to you."

It's a technical point, but the real estate agent must report the gross commission amount on Schedule C.  Of course real estate agent only pays taxes on the net profit.

The 1099-NEC that the agent receives from the real estate brokerage must reflect the gross commission, which would include the subsequently rebated amount.  

[raj18]

Thanks for the answers tax experts!