If a real estate agent is representing themselves as Buyer's Agent in the purchase of a property and credits/rebates their commission to themselves

[REAgent]

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!

[DaveF1006]

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]

[Mary0111]

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.   

[DaveF1006]

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. 

[Mary0111]

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.     

[newuser1054]

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.

[sumodog123]

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.