Is a commission rebate taxable to buyer's agent? My buyer agent said she has to pay taxes on 1% of commission she will credit me at closing because it's her income.

[Hal_Al]

Yes and no.

She may have report the income on her tax return, if she gets a 1099 or W-2 for it. But she can then deduct the rebate as a business expense, so that she does not actually pay tax on it. 

[TomD8]

IF the rebated amount is included in the agent's taxable income, she will of course pay taxes on it.  But'll she'll be able to deduct the rebated amount as a business expense on her Schedule C. The rebated amount is not taxable income to the buyer, as explained below by Critter #2.  For that reason, the buyer's agent should NOT issue a 1099-MISC to the buyer.

Interestingly, according to this DOJ website (last updated October 2015), ten states ban such rebates: <a rel="nofollow" target="_blank" href="https://www.justice.gov/atr/rebates">https://www.justice.gov/atr/rebates</a>

[alu2008]

What type of business expense can the agent report on their taxes if they should not be issuing a 1099-MISC to the buyer?

On a property worth $400K, buyers are asking for rebates to the tune of 2%, i.e. ~$8K. What type of business expense can an agent who works as a sole-proprietor show on his taxes for $8K?

What IRS paperwork is the agent required to keep as evidence for documentation purposes for large expenses such as these? I was unable to find any information from the IRS in this regard.

Any factual data on this would be helpful.

Many Thanks in advance

[Critter]

On the Sch C  use the "make your own category" to deduct  the rebated fee ... call it anything you want.  Then keep any documentation of the transaction ... like a written agreement and the cancelled check.

[alu2008]

Thanks for the information

[Critter]

Tax reporting for commission rebates

In today’s difficult housing market it has become commonplace for brokers to offer buyers a cash rebate of a portion of their commission. A common question many brokers and buyers have is whether such rebates are taxable income that must be reported to the IRS on Form 1099-MISC. The answer is no.

The IRS says that a cash rebate paid to a buyer of property at or after closing is an adjustment in the price, and is therefore not taxable income to the buyer. Rather, the buyer should subtract the amount of the rebate from the home’s basis. This will, of course, increase any potential profit when the home is sold.

Since they are not taxable income, such rebates need not be reported on Form 1099-MISC. Thus, brokers should not send 1099s to buyers reporting such rebates. Any buyer who has received a 1099 that reports such a payment in error should ask the broker to correct or withdraw it.

https://www.inman.com/2011/05/06/tax-practices-real-estate-commissions-rebates/

[ocococ]

Do you know if the commission is taxable if the real estate agent is also the buyer? As a real estate agent and buyer of a new development from a builder, the builder is offering a commission back to real estate brokerage, which in turns the brokerage will issue a 1099 back to the agent/buyer for commission in this case. Does this commission need to be reported as taxable income? Or can it still be deducted from cost basis and deferred the tax to the future when agent/buyer sells this house? Thank you!

[TomD8]

@ocococ --  If the buyer acted as agent on the sale, his commission as reported on his own 1099-MISC is definitely taxable income.  

[Jbucaille]

Was the rebate disclosed to all parties in a form of an addendum, and did that rebate appear in the closing statement? If so there is no tax that the agent pays on it, because this is a portion of her commission that she won’t earn and it won’t appear in her 1099. In this case it is not considered income for you.

BUT, if she gave you a check at closing and it doesn’t appear in the ALTA closing statement, she is actually giving you a miscellaneous income, after she pays taxes on it. And she should send you a 1099, otherwise it would be considered a “kickback” and no more a rebate. And this is completely illegal. A rebate to be legal must be disclosed to all parties and appear in the closing statement.

[TomD8]

@Jbucaille --

In the private letter ruling cited below, the IRS ruled that a payment or credit from the purchaser's agent to the purchaser (i.e. a rebate) represents an adjustment to the purchase price of the home and generally is not includable in the purchaser's gross income. The IRS also ruled that the agent did not have to issue a 1099 to the purchaser even if the rebate was more than $600.

https://www.irs.gov/pub/irs-wd/0721013.pdf

[mahinmotlagh]

Under what category is this a business deduction?  

During the year, I gave both my sellers and my buyers over $100,000 in rebates and discounts.  For the sellers, they got the additional money through escrow and will pay taxes on it as part of the profit of the house, so I don't feel comfortable giving them a 1099 and having them pay taxes twice.  For my buyers, many used the rebate to buy down the loan rate, something that would normally be tax-deductible for them if they used their own original funds, so again, I don't feel comfortable giving them a 1099.  Plus, in both circumstances, I didn't tell my buyers and sellers that they would be receiving a 1099 and I don't want to go back to them now with that news.  

Any help would be appreciated!

[KrisD15]

If the amount is included on your 1099, add "Rebates" to the Miscellaneous deduction category and list the amount there. 

You can deduct a rebate, since you returned the funds, but you cannot deduct a discount, since a discount means you simply lowered the price on a product you sold. 

Be sure you have the paperwork to justify the deduction and keep a copy with your tax files. 

REBATES

[TomD8]

Key phrase from @KrisD15 : "If the amount is included in your 1099"

In other words, you can deduct a real estate commission rebate as a business expense only if you paid income tax on the full amount of the commission (including the rebated amount).

You do not issue a 1099 for the rebated amount, because the rebate is not considered taxable income to the buyer.  It is considered a reduction in the selling price.

[Donnar25]

I am an agent who will also be the buyer. The builder is giving me a 5% commission that can be used to reduce the price of the home. Is that commission taxable to me or my broker?