If a real estate agent is purchasing a property, represents themselves as Buyer’s Agent, and credits/rebates their commission to themselves: would this commission rebate be considered a non-taxable event (reduction in cost basis of property) just as if they had given said commission rebate to a client that was not themselves? In other words, does the fact that the Buyer happens to also be the Buyer’s Agent make this otherwise non-taxable commission rebate taxable?
Within the context of the above, the primary question is the following: should an employing broker issue a 1099-MISC to one of their agents who represented themselves as Buyer's Agent, and credited their entire commission as Buyer's Agent to themselves as Buyer?
Assuming the realtor operates as an independent contractor:
If the realtor/agent reports their full commission as income on line 1 of his or her Schedule C, the realtor/agent may then deduct the rebated amount on that Schedule C.
The realtor/buyer must then reduce their cost basis in the home by the amount of the rebate.
Thank you very much for your reply. Within the context of the original question, the primary purpose of our question is to determine the following: should an employing broker issue a 1099-MISC to one of their agents who represented themselves as Buyer's Agent on a purchase, and credited their entire commission as Buyer's Agent to themselves as the Buyer?
Yes. The employing broker should include the agent's full commission in the agent's year-end 1099-MISC.
Very fortunate to find this Question/Answer since I have a similar situation that I'm hoping to get clarification on!
My wife (a licensed realtor) represented us as the Buyers Agent when purchasing our new home. The seller credited her commission back to the Buyer (i.e. my wife and I) during Closing.
1) Would this still be treated as a non-taxable event (reduction in the cost basis of the home)?
2) Is this reportable as income when we file our taxes? Neither our closing attorney or the seller has sent us 1099
1. Yes. The rebate is regarded as a reduction in the purchase price of the home and is not taxable income to the buyer.
2. No. Logically follows from (1).
Here's an IRS letter on the topic: <a rel="nofollow" target="_blank" href="https://www.irs.gov/pub/irs-wd/0721013.pdf">https://www.irs.gov/pub/irs-wd/0721013.pdf</a>
Note that a 1099 should NOT be issued to the buyer for the rebate amount.
Hi Tom,
The link to the IRS publication does not work, can you repost?
Thanks!
@Agill10 wrote:
Hi Tom,
The link to the IRS publication does not work, can you repost?
Thanks!
Hi
did you ever found out the correct answer for this because I’m dealing with a similar scenario
Hi Tom,
I have a similar question. It looks like you gave 2 different responses so I’m a little confused. Is this the correct response
1. Yes. The rebate is regarded as a reduction in the purchase price of the home and is not taxable income to the buyer.
2. No. Logically follows from (1).
Here's an IRS letter on the topic: <a rel="nofollow" target="_blank" href="https://www.irs.gov/pub/irs-wd/0721013.pdf">https://www.irs.gov/pub/irs-wd/0721013.pdf</a>
Note that a 1099 should NOT be issued to the buyer for the rebate amount.
Very good answers listed above but I hope this information might be helpful.
The question regarding a taxable event to the Realtor would depend on how the Realtor commissions are listed on the Closing Statement (HUD).
If the Realtor who represents himself in the transaction as a Buyer Agent did not receive a commission on the sale then there is not a taxable event to the Realtor. The commission would not be reflected on the HUD and you would figure your basis in the property with no commission from the Buyer side.
However, if you did receive a commission on the sale of the property then you should receive a 1099 as income and handle as you would with any other 1099 income as a Realtor. This commission would show up on the HUD and you would adjust your basis in the property for the commission.
Hello RayW7, hope you are well. I stumbled upon this thread doing some research. From what I gather, you said that if an agent represents themselves in the purchase of a home and a 1099 is issued by the brokerage but the agent contributes their commission as a closing cost credit, that the commission would not be taxable income to the agent it would be considered a deductible expense. The closing cost credit would then reduce the basis in the property by the amount of the commission that was credited.
I would like to know if you have any specific section of the tax code that confirms this. I am considering doing this and from what I have seen so far, if I represented another party yes the closing cost credit would be considered a business expense to offset the 1099 income but if I represent myself it is considered a personal expense. I was wondering if you could possibly provide any more detail regarding this, it would be greatly appreciated. Very different tax implications obviously and anything you could provide regarding your source for this would be very helpful!
Thank you in advance.
Hi TomD8, hope you are well. I read your responses to the original poster as well as the IRS letter from the link you provided. The IRS letter, written in legal speak, from what I gather discusses an agent issuing a closing cost credit to their client. The agent isn't obligated to issue a 1099 to the client, the IRS treats the closing credit as a reduction in the basis of the home. The credit issued by the agent can be treated as a business expense offsetting their 1099 income.
My question as the original posters as well, if I were to do this for myself, I am issuing the credit to myself, wouldn't the expense be considered a personal expense and therefore not deductible from the 1099 income? I can't find anything in the tax code about this but from a general rule it would seem to be a personal expense.
Do you have anything additional you can provide on this as to why the IRS would allow you to treat yourself as a client and consider it an expense and reduce the basis in the home vs keeping it as taxable income. Any guidance would be appreciated because there is obviously a significant benefit to being able to reduce the basis.
Thank you in advance for your help.
It depends on if you are representing yourself as a buyer or seller of your own property. If this is the case, you may need to check on the real estate laws of your jurisdiction to see if this is permissible.
Researching the IRS statues, I could not find clear guidance for this question so it depends on the real estate laws in your state or local jurisdiction. If permitted, then you may be able to act as your own broker for your property and this could be a business and not a personal expense.
Hi DaveF1006, thanks for your response. It is permissible in my state to act as my own agent when buying or selling real property. In this case, acting as our own buyer's agent and contributing the commission to our closing costs is permissible. You mention this could then be considered a business expense and not a personal expense. My question is how would I classify it as a business expense considering it would be an expense that would be paid to ourselves. If you can add some additional clarity to how to classify the business expense that would be greatly appreciated. Thank you!
Since this is uncharted territory concerning the IRS, I would consider consulting a real estate attorney so that the laws of your state can be properly applied. At this point, this becomes more of a legal matter and opinion rather than a tax matter. I only say this because there isn't any IRS precedence for this type situation and this is where my advice must end.
[ Edited 01/18/22|04:36 PM PST]
My husband received his commission as a credit on the HUD for the home we purchased that he was the Buyer's Agent for in 2021. He received a 1099 from his Broker. I read a lot about this question in the Community trying to find the correct answer as to whether this transaction was taxable income versus a non taxable credit on the purchase of the home where there should be an adjustment in the basis for the commission. I spoke with a CPA who informed me that my husband's commission was taxable income even though it was used as a credit on the purchase of the home, and there was no way around it. I feel that using the commission as a credit on the purchase of the home and thinking it is not taxable income is just wishful thinking. There is a lot of ambiguity in the subject, but no clearly defined rule as far as I can see.
It depends. There is no clear IRS precedence that addresses this type on income. Therefore as a credentialed agent, I would advise to report it as income.to take a conservative approach to the issue. If you don't report it, it may reappear in the form of an IRS audit and since there is no clear precedence for this type of income, the IRS will deny your claim unless you can prove convincingly that they are wrong. You may end up in tax court as a result and create more headaches for yourself than you can ever imagine.
Thank you so much for this answer because it allows me to put this question to rest once and for all. I've spent way too much time investigating this issue, and although several people have stated that the commission isn't taxable if it's credited towards the purchase, the 1099 the broker sent tells me otherwise. I believe there is way too much ambiguity regarding this subject, and as you stated there is no clear IRS precedence that addresses this type of income.
Based on IRS publication https://www.irs.gov/pub/irs-wd/0721013.pdf my interpretation is that if a Buyer acting as their own Buyer's agent is applying their commission as a credit to offset closing costs, escrows, and prepaids, then their brokerage would not be receiving the payment and no 1099 should be issued and no taxable income was received but this commission credit would simply reduce the cost basis of the property.
My understanding is, however, that if the buyer wished to apply their commission towards income qualifications and towards the down payment amount instead of as a credit (Reference Freddie mac guide section 5501.3 Asset eligibility and documentation requirements: subsection 8. Borrower's real estate commission https://guide.freddiemac.com/app/guide/section/5501.3 ) , then their brokerage would actually receive the commission payment, pay it out to you as the agent and it would be taxable income to you on your 1099.
So, what difference would it be if I had a fellow Realtor represent me and credited me the whole commission? He wouldn't be taxed as he would have a net zero gain. Even though, I am a Realtor, I am just a buyer in this case. I think your CPA was just playing it safe because he didn't know and didn't want to risk it. Tax avoidance is okay. Tax evasion is what can get you in trouble.