Michelle,
Good question. I'm assuming the rebates are on the HUD-1 to make it legal. I'd like to know the answer to this myself.
It's not free money, The IRS wants all the tax dollars they can get. The commission you earn is taxable, so if the buyer is getting part of your earned income it is taxable to them. I was a tax accountant and had a tax business in my past. You can call the IRS hotline and they can explain it to you. If the buyer show it being a reduction on closing cost, it may be allowed as an adjustment to the basis for the calulation on the 2119 form when they sell the house. Every serino is different and a case per case needs to be looked at by the IRS or have them get with their CPA. It is all in how the money is received.
The correct answer is NO. The companies that offer rebates, such as Ziprealty and others, report those as a marketing and advertising expense and DO NOT pay taxes on that money or 1099 it to clients.
What if you agreed to take $1000 less in commission from the seller and the seller reduced the price?
The rebate can be given as a check after closing or applied towards the buyer's closing costs.
Legal question, huh? A. In our state, and I think most, payment of a commission to an agent working with a buyer must come ONLY from the Principal Broker. I think you may have a violation if you are giving a Buyer credit on the HUD-1 for a commisssion that has not yet come to you via the legal channel of your Broker. So be careful there. B. If it is an (after the closing, after you get your check from the Broker) rebate out of your funds, you better make it clear that you expect the Buyer to get tax advise about it, because my guess is that you aren't going to want to pay the tax on it.
If this is a common practice with your office, better get the right kind of advice, be careful there who you talk to as well.
Troy
Correct. As always, everything comes thru the broker. That is why we have used a Buyer Rebate Agreement Form which the buyers signs and the broker signs also. This way there is no questions that it is coming off the top of the gross commission BEFORE the split.
More.........
If the broker does not want to participate and the agent wants to handle it strictly between themself and buyer, it would still be treated as a marketing and promotion expense against the agent's Schedule C income.
I'm not overly familiar with rebates, but if it's in my commission check, I'm pretty sure I'm getting taxed on it.
Last year a listing agent and I reduced our commission to negotiate the release of a mechanic's lien on the property. It was very long and involved and I won't bore you with the details, but because the commission was reduced, it didn't show up in my check. It also didn't show up in the Seller's proceeds on the HUD. I have also given a concession on a commission to get the two parties in the same arena. Again, though, it didn't show up as income for me. It reduced the sale price, proportionately reducing the Seller's net.
If it shows up on the HUD in the Seller's proceeds, the Seller, based on the net, would pay any appropriate taxes. As I understand it........
Lou, It was a real pleasure speaking to you. Thank you for the call. Can you email me the Buyer reabate form or give us the language here on reliberation. My email is TheHatlady@comcast.net
Wow. Is This The Same Michelle Leonard of Chesterbrook, Wayne Fame? It is truly an honor!
Follow RESPA and HUD guidelines. Rebates in real estate are not the same as Home Depot or Sears.
Happy Selling!
Seems to me a clean and easy way to keep everyone happy and in compliance is to simpy offer a "seller concession" toward buyer's closing costs, while at the same time reducing the commission charged to the seller by the same amount. FNMA allows from 2-6% seller concessions under MOST loan programs. It will show up on the HUD 1 as a credit to the buyer's closing costs, so no violation of RESPA nor is it hidden from the lender ... It will reduce buyer's out of pocket cash to close.. you'll receive less commission... but seller will net same sales proceeds as before. Taxable to buyer? Don't think so.. I understand a concession reduces buyer's tax basis in the new property, meaning there is more "gain" when the property is resold than would otherwise be recognized.
This is what my office does. We call it a difference of commission, not are a rebate. If a buyer signs a buyer agency agreement with me and the agreed upon fee is 3% (for example), it states that I will be compensated by the seller through the listing broker. However, when a commission on a listing is 3.5% (for example), then all I contracted with the buyer for is 3% . . . we give him a difference of commission check. I am only taxed on the 3% and I don't feel this is taxable income to the buyer because he paid for the house. All the money comes from the buyer through the purchase price.
John,
Yes It's me. Where is your office? I am at Long and Foster in Devon. What do the Respa and HUD guidelines say? Have you ever done anything like this and how does it work? What do you call it?
I have to comment on this! First of all, my broker won't allow me to call it a rebate. It is a credit to the buyer. Secondly, yes, I am taxed on it. The Listing agent pays me, I inturn give a credit. My 1099 was NOT reduced, I am paying tax. I was told to show it on my tax return as a fee paid or commission paid. Somehow, it doesn't seem right. If anyone has a better way, PLEASE, let me know!
I have done it before but it is on the hud 1 as a credit to the buyers closing costs from the firm I work for. (I also work as 100%)
If I do it this way on the hud it does not go on my 1099.
If I do it outside after closing than it is on my 1099 and I have to deduct it as a business expense which it is.
I prefer to do it on the hud but one time because of a screw up with a title company I was not going to delay the closing - i just paid it after the closing.
Why give a rebate at all?
Tim
Super client/investor and good friend who has purchased 5 properties iin last 16 months . Very little work involved - they drive by listings I send if they are interested in something they see they call me. They don't waste my time.
Rick,
That makes sense. I'm more curious about the agents who give rebates as a standard part of their business plan. I just don't understand the philosophy in that... I suppose they believe it increases their 'volume' sufficiently to offset the lost income but those I'm familiar with who do it don't seem to be all that successful to me... it seems more like an act of desperation just prior to going under. Just my opinion... don't have any hard data to support it though.
Hi Michelle:
My office is in East Norriton, about 10-15 min. from King of Prussia.
Anyway, to answer your questions, my suggestion is to make sure if you do offer a credit, that it appears on the settlement sheet. You'll have to have the mortgage company's approval, but this will probably keep you clean with RESPA...
Also...I suggest that whatever you do, run it by your broker. Keeps everybody on the same page and avoids problems down the road.
I have had difficulty finding lenders who will allow a rebate to go on the HUD-1. Does anyone know of any lenders who allow it?
Gentleman, I refer you to the above Letter Rulling from the IRS. In which they indicate rebates are purchase price adjustments and are not taxable.