Author Topic: Rebate on New home purchases - Discuss  (Read 72024 times)

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Offline test

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Re: Rebate on New home purchases - Discuss
« Reply #240 on: September 13, 2018, 01:55:31 PM »
Can anyone send me a link or something I can send to my CPA regarding this? He believes the only way is 1099. Also had a friend go through something with IRS saying it has to be 1099 as well.

Besides the IRS ruling with Redfin, you just need to step back for a second and apply some common sense when it comes to the "earned income" definition.  The IRS defines it as earnings from you working for someone or some company who pays you providing goods and/or a services OR earnings from you owning and running a business or farm (investments, rentals, etc would fall into this group).  Where has the buyer done work for the agent to constitute earned income?  Obviously it's the other way around.  So the rebate is a reduction of the cost basis in the home (the same way it would be if the agent provided the rebate as a credit towards closing costs in escrow).  So I'd also for any agent or CPA to explain to me why a rebate done through escrow is treated a reduction of cost basis but a rebate outside of escrow should be treated as earned income?  See how that makes zero sense.  Just like you have uneducated and/or lazy agents, there are also CPAs that are no better.


My understanding is, if the rebate is done through escrow, (1) the actual amount seller paid to Buyers broker (factoring if Broker gave a rebate to Buyer) is what the Seller reports to the IRS and the rebate portion is treated as a reduction to purchase cost.  So I agree with what you posted on the process through escrow. 


Example, if the full commission that seller was paying to Buyers broker is $10,000, and Buyers broker told Seller and escrow to allocate $5,000 of his/her commission and treat this as a rebate and reduction to the purchase price.  The amount Seller would report on the 1099 issued to Buyers at $5,000 since that is the amount the seller actually paid to the Buyers broker and the other $5,000 would be treated as a Sellers reduction to purchase price.

Using the same example amounts listed above, IF full commission was issued to the Buyers broker outside escrow.  Then the Seller would issue the Buyers broker a 1099 for $10,000 since that is the amount the Seller actually paid the Buyers broker.  So unless the Buyers broker wants to pay taxes on the $10K, he/she will need to redirect the portion of this income towards the Buyer by issuing the Buyer a 1099 for $5K for the portion the Buyers broker gave to Buyer as a rebate outside escrow.  By doing this the Buyers broker will net their income earned from $10K to $5K (10K received from Seller less 5K given back to Buyer via 1099) and the Buyer will pay taxes on the $5K they received from the broker.  Hopefully this makes sense. 

Basically the issuing of 1099 from Buyers broker to Buyer is to benefit the Buyers broker and for them to pay taxes only on the actual amount they received vs. the full amount issued by Seller IF the process was done outside of escrow.

Also not all rebates are considered non taxable income.  Example, rebates issued from utility companies are considered taxable income.

Anyway, my 2 cents.

To be very precise here's how I do it on my Schedule C...

Line 1 (Gross Receipts/Sales) - I input the 1099 that I receive from my broker (commission rebates made through escrow are reflected in that number)
Line 2 (Returns & Allowances) - I input the total commission rebates made outside of escrow which is a deduction to Line 1



Hope you never get audited because unless it's shown on the HUD-1 then it's not a rebate it's a gift and you can only deduct $25.

Offline USCTrojanCPA

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Re: Rebate on New home purchases - Discuss
« Reply #241 on: September 13, 2018, 06:51:34 PM »
Can anyone send me a link or something I can send to my CPA regarding this? He believes the only way is 1099. Also had a friend go through something with IRS saying it has to be 1099 as well.

Besides the IRS ruling with Redfin, you just need to step back for a second and apply some common sense when it comes to the "earned income" definition.  The IRS defines it as earnings from you working for someone or some company who pays you providing goods and/or a services OR earnings from you owning and running a business or farm (investments, rentals, etc would fall into this group).  Where has the buyer done work for the agent to constitute earned income?  Obviously it's the other way around.  So the rebate is a reduction of the cost basis in the home (the same way it would be if the agent provided the rebate as a credit towards closing costs in escrow).  So I'd also for any agent or CPA to explain to me why a rebate done through escrow is treated a reduction of cost basis but a rebate outside of escrow should be treated as earned income?  See how that makes zero sense.  Just like you have uneducated and/or lazy agents, there are also CPAs that are no better.


My understanding is, if the rebate is done through escrow, (1) the actual amount seller paid to Buyers broker (factoring if Broker gave a rebate to Buyer) is what the Seller reports to the IRS and the rebate portion is treated as a reduction to purchase cost.  So I agree with what you posted on the process through escrow. 


Example, if the full commission that seller was paying to Buyers broker is $10,000, and Buyers broker told Seller and escrow to allocate $5,000 of his/her commission and treat this as a rebate and reduction to the purchase price.  The amount Seller would report on the 1099 issued to Buyers at $5,000 since that is the amount the seller actually paid to the Buyers broker and the other $5,000 would be treated as a Sellers reduction to purchase price.

Using the same example amounts listed above, IF full commission was issued to the Buyers broker outside escrow.  Then the Seller would issue the Buyers broker a 1099 for $10,000 since that is the amount the Seller actually paid the Buyers broker.  So unless the Buyers broker wants to pay taxes on the $10K, he/she will need to redirect the portion of this income towards the Buyer by issuing the Buyer a 1099 for $5K for the portion the Buyers broker gave to Buyer as a rebate outside escrow.  By doing this the Buyers broker will net their income earned from $10K to $5K (10K received from Seller less 5K given back to Buyer via 1099) and the Buyer will pay taxes on the $5K they received from the broker.  Hopefully this makes sense. 

Basically the issuing of 1099 from Buyers broker to Buyer is to benefit the Buyers broker and for them to pay taxes only on the actual amount they received vs. the full amount issued by Seller IF the process was done outside of escrow.

Also not all rebates are considered non taxable income.  Example, rebates issued from utility companies are considered taxable income.

Anyway, my 2 cents.

To be very precise here's how I do it on my Schedule C...

Line 1 (Gross Receipts/Sales) - I input the 1099 that I receive from my broker (commission rebates made through escrow are reflected in that number)
Line 2 (Returns & Allowances) - I input the total commission rebates made outside of escrow which is a deduction to Line 1



Hope you never get audited because unless it's shown on the HUD-1 then it's not a rebate it's a gift and you can only deduct $25.


I have been audited and my position is the same position as Redfin used...it's a reduction of cost basis vs. 1099 income to the buyer because the rebate does not fall under the IRS definition of "earned income" because no goods or services were provided by the buyer to the agent.  It doesn't matter whether the rebate is done via escrow or outside of escrow, that's a formality.  The name of the buyer on the rebate check matches the closing statement exactly and the memo section also has commission rebate - 123 Main Street.
Martin Mania
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mmania001@yahoo.com
714-747-3884 cell

Often imitated....Never duplicated!

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Offline test

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Re: Rebate on New home purchases - Discuss
« Reply #242 on: October 10, 2018, 10:14:53 PM »
I didn't say it was earned income.  I said it's a gift.  It's also not a reduction of cost basis because the escrow documents don't show a reduction in cost basis.

Offline USCTrojanCPA

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Re: Rebate on New home purchases - Discuss
« Reply #243 on: October 11, 2018, 06:48:56 PM »
I didn't say it was earned income.  I said it's a gift.  It's also not a reduction of cost basis because the escrow documents don't show a reduction in cost basis.


It's a reduction of cost basis, same as if the rebate went through escrow (both a non-taxable event to the buyer) since Redfin's rebates would be done outside of escrow at times.  You can trust me on this, I worked with a former IRS lawyer when I got audited.
Martin Mania
AgencyOne
CA BRE License # 01799007
mmania001@yahoo.com
714-747-3884 cell

Often imitated....Never duplicated!

 

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