Real Estate Agent commissions


P

propMgr

I wanted to see how the following situation can be dealt with:

Lets say I buy a fixer house and the agent who represents me (the buyer) get a 3% commission. Now he agrees to give me a portion of that commission to cover my expenses to assist in the upgrade of the house, paying for closing costs etc.

How would the agent show this "kickback" of commissions on his tax return?

And is it possible for me as the buyer to use this "kickback" as a reduction in the basis of the purchase of the house (which I plan to occupy) or do I need to declare this as income?

Thanks.
 
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J

JoeTaxpayer

I wanted to see how the following situation can be dealt with:

Lets say I buy a fixer house and the agent who represents me (the buyer) get a 3% commission. Now he agrees to give me a portion of that commission to cover my expenses to assist in the upgrade of the house, paying for closing costs etc.

How would the agent show this "kickback" of commissions on his tax return?

And is it possible for me as the buyer to use this "kickback" as a reduction in the basis of the purchase of the house (which I plan to occupy) or do I need to declare this as income?
If it's a legitimate deal, it should all appear on the closing
paperwork, i.e. it needs to be accounted for on both sides as he surely
won't want to pay tax on income he doesn't receive.
If done correctly, it's a reduction in basis.
 
T

TheMightyAtlas

If it's a legitimate deal, it should all appear on the closing

paperwork, i.e. it needs to be accounted for on both sides as he surely

won't want to pay tax on income he doesn't receive.

If done correctly, it's a reduction in basis.
Both times this type of deal has been offered to me, it was clear that this would NOT be on the closing documents, but would be a 'referral fee' paid to me after closing. The agent did not want the broker to know that he or she was charging a lower commission than the agency specified. At least in our ethnic community, these arrangements are quite common. I don't know if this is what you would not consider "legitimate" but I walked away from both deals. I don't like to do business with someone who is cheating his employer. Morality aside, I think he is declaring up front that he is not to be trusted.

One of the agents told me that he would be issuing me a 1099 for the payment. This was about four years ago.

Cheers!

Brian
 
S

scott s.

Both times this type of deal has been offered to me, it was clear
that this would NOT be on the closing documents, but would be a
'referral fee' paid to me after closing. The agent did not want the
broker to know that he or she was charging a lower commission than
the agency specified. At least in our ethnic community, these
arrangements are quite common. I don't know if this is what you
would not consider "legitimate" but I walked away from both deals. I
don't like to do business with someone who is cheating his employer.
Morality aside, I think he is declaring up front that he is not to
be trusted.

One of the agents told me that he would be issuing me a 1099 for the
payment. This was about four years ago.

Cheers!
I think one point is that a listing agreement (contract) is between
a seller and licensed broker. A licensed agent has a separate
commission agreement with the broker. I think generally to protect
all parties' interests "kickbacks" out side of closing are not
permitted and can result in enforcement action by licensing board.
An added complication in my state is that agents are liable for
"sales tax" on gross commissions so the state is interested in the
actual commission. The licensed agent is an independent contractor
and gets a 1099-misc from the brokerage so has to account for that
amount.

scott s.
...
 
S

Seth

TheMightyAtlas said:
Both times this type of deal has been offered to me, it was clear
that this would NOT be on the closing documents, but would be a
'referral fee' paid to me after closing. The agent did not want the
broker to know that he or she was charging a lower commission than
the agency specified. At least in our ethnic community, these
arrangements are quite common. I don't know if this is what you would
not consider "legitimate" but I walked away from both deals. I don't
like to do business with someone who is cheating his employer.
Morality aside, I think he is declaring up front that he is not to be
trusted.
I don't see how the employer is being cheated. Making up numbers,
house sells for $500,000. Commission (to brokerage firm) is 3% =
$15,000. Broker gets half, $7500. Broker rebates $2500 to client.
The broker's firm keeps its half, $7500; the broker keeps $5000. How
does the firm lose by this arrangement?

I consider prohibiting such rebates to be price fixing.

Seth
 
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T

TheMightyAtlas

I regretted posting that comment as soon as I did. Not because it was incorrect, but because it is not related to taxes. So let's leave it that in my experience, the agent will issue you a 1099 because he or she wants to be able to deduct it from their taxable income. They can't avoid it, because the broker is going to issue them a 1099 for the agent's full share of the commission. You can exclude it from your income, and respond to the IRS inquiry that follows with a letter referring to the private letter ruling that Redfin obtained. Redfin rebates part of the buyer's agent commission to the buyer, but of course in that case everything is transparent. It's basically an important part of their business model. But the IRS shouldn't care about whether the broker approves of the payment, should they? So the principle should still apply, I think.
 
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