Tax on the commission provided by the realtor on the purchase of the property

[snandi1603]

Hi Experts,

I am buying a new construction house in California, Sanjose. My realtor is getting 2.5% commission on the base price of the property from the builder, the realtor is giving a certain percentage of the commission to me as an incentive but he is also saying that he will give me a 1099  and I have to pay taxes on the received amount.

Is that correct? I was under the impression that me as the purchaser of the property do not have to pay taxes on the portion of the commission I am paying.

Can you some please help me in getting the clarity? Thanks a lot.

Regards,

Sudipto

[Opus 17]

The money is not taxable income to you, it is treated as a reduction in the purchase price.  (This might increase your taxable capital gains whenever you sell in the future, but it is not taxable now.)

If you get a 1099 there are two ways to deal with it.

1. Do not include it on your tax return.  File by mail, don't e-file.  Attach a copy of the 1099 and a letter explaining why it is not taxable income.  Don't attach other proof, but save your proof for as long as you own the house plus 3 years after you sell.

2. Include the 1099 as income.  Then, go to the "other uncommon income" section and enter an item of income called "non-taxable 1099" and the amount is the negative amount of the 1099 that will offset the 1099.  You can e-file after doing this, but the IRS may send you a letter asking for more information. 

[snandi1603]

Thanks @Opus 17 for your response,

I have another followup question.

so right now I have not received the 1099 yet. So I shall tell my realtor to not give me 1099 instead use it to towards the reduction of the purchase price?

Also, when we say reduction of the purchase price or the "Reduction of the home basis" what exactly it means?

Does it mean that if my house price is X $ and Realtor gives me Y$ commission, then while registering the house the price of the house would be (X-Y)$?

Thanks,

[Opus 17]

---

@snandi1603 wrote:

Thanks @Opus 17 for your response,

I have another followup question.

so right now I have not received the 1099 yet. So I shall tell my realtor to not give me 1099 instead use it to towards the reduction of the purchase price?

Also, when we say reduction of the purchase price or the "Reduction of the home basis" what exactly it means?

Does it mean that if my house price is X $ and Realtor gives me Y$ commission, then while registering the house the price of the house would be (X-Y)$?

Thanks,

---

It would certainly be simpler if the real estate agent will agree to reduce the contracted selling price, but that is also up to the seller and the seller probably doesn't want to get involved in your side deal.  So I suspect it won't happen.

Most of the time, the commission is paid by the seller.  For example, where I live a 6% commission is common, 3% to the selling agent and 3% to the buyer's agent.  Sometimes if they same agent works both sides, they will offer a discount or rebate.  In your case, if the selling price is $100,000, the seller might get $94,000, with $3000 to each agent.  You pay $100,000, and your agent then rebates you $1500.  Your net purchase price for tax purposes is $98,500.  It is possible, but unlikely that you could get the seller and the seller's agent to agree to a selling price of $98,500, where you pay $98,500, your agent takes $1500, the other agent takes $3000 and the seller takes the same $94,000.  You can ask.

If you keep the contract as is and the agent gives you a rebate, they may feel they must issue a 1099 for business reasons, you probably can't stop them from doing it.  It's up to you to show the IRS that the money was not taxable, that's not the agent's job to deal with your taxes. 

For tax purposes, the purchase price is what you paid after taking into account any adjustments or concessions.  For example, if you were to buy a house for $100,000 but you also had to pay $5000 of the previous owner's property taxes before the county would allow the sale, then your purchase price is really $105,000.  Or, if the agreed price is $100,000 but the real estate agent will rebate $1000 of his commission, then your purchase price is really $99,000.  Your purchase price is also your cost basis, which is used when figuring gains or losses (when you sell), depreciation (if you use the home for business) and a few other things.   Cost basis is, roughly speaking, the amount of already-taxed money you have invested in something.  If you buy a house for $100,000 and then pay $5000 to renovate the kitchen, you have a total adjusted cost basis of $105,000, the amount of already-taxed money you have invested in the home.  If you later sell it for $150,000, you have to pay capital gains tax on the increase from your basis ($45,000 in this example) but you don't pay tax on the rest of the payout since you already paid tax on that money before you bought the house.