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May a licensee offer a cash inducement to a buyer or seller?

It is not a violation of the Illinois Real Estate License Law to offer cash or another type of inducement to a party to a transaction. It is still illegal, however, to offer compensation to an unlicensed person for referring business to you.

A broker must be certain that the inducement is going directly to the actual owner of the property he is listing or to the party taking title to the property. The License Law further requires that whenever a licensee advertises merchandise or services as being "free" that all conditions of the offer must appear in the ad. This means that if you place a clause in the ad saying, "call the office for further details," you may have an incomplete ad. You must place all limiting conditions of your offer in any advertising of the promotion, e.g. offer contingent on sale closing.

A listing or selling office that offers an inducement to a buyer should notify the seller in writing prior to submitting an offer that the buyer will be receiving the cash or merchandise.

TAXATION OF RETURNED COMMISSIONS

Sometimes a real estate broker will agree to give part of their commissions back to the seller or the buyer in order to close the sale of a property. When this is done, how the transactions are actually structured will control whether or not the broker must include the entire commission in gross income or only the net commission. There is also an effect to the seller or the buyer of the property

REBATE OF COMMISSIONS

A recent IRS private letter ruling and court case dealt with the issue of the taxabillity of rebates of commissions. In a recent IRS private letter ruling 200721013(2007) the real estate agent would rebate commissions in one of two ways (1) after closing, the cash and loan proceeds are distributed to the seller and the agents, and after the purchasers agent receives the agreement or (2) the purchaser receives a credit at closing in the amount equal to the amount of commisssion the purchasers agent agreed to rebate to the purchaser. The IRS ruled that a payment or credit from the purchasers 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 purchasers 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.

In the case of Robert E. Corrigan v. Commissioner TC Memo. 2005-119, May 23, 2005 the taxpayer was a stockbroker. The taxpayer paid the brokerage commission rebates to a client while he was employed by a brokerage firm. The taxpayer reduced the gross income he received from the brokerage firm by the amounts he "rebated" to the client. The court ruled the rebates were not excludable from the taxpayers gross income but that they were deductible as itemized deductions as an unreimbursed business expense.

RETURNING COMPENSATION TO THE SELLER

Generally, when a REALTOR® agrees to return part of the commission to the seller, this should be structured simply as a reduced commission on the closing settlement statement. The broker recognizes only the reduced commission disbursed at closing which should reflect only the net commission as per the closing settlement statement. There are no additional reporting requirements as a result. If however, the reduced commission is not reflected on the closing statement, but is instead returned to the seller after closing occurs, the REALTOR® will include the full commission in income and be entitled to an offsetting deductible expense for the commission returned. There are still no additional 1099 reporting requirements over what is otherwise required. In either case however, the seller should treat the returned commission as a reduction in the selling expenses when computing the gain or loss on the sale of the property. The buyer will be unaffected by this.

RETURNING COMPENSATION TO THE BUYER

Essentially, the same principles apply when returning part of the commission to the buyer. If the reduction of commission is shown on the closing settlement statement as a credit to the buyer’s purchase price, only the net commission is recognized as taxable income by the REALTOR®. The seller is unaffected by this and the buyer’s tax basis in the property in reduced by the amount of the returned commission. If however, part of the commissions is repaid to the buyer after closing, the REALTOR will be required to include the full commission in income and be entitled to a deductible expense for the returned commission. The buyer must still reduce the tax basis of the property by the commissions repaid to him No reporting requirements are required to be made to the buyer. The receipt by the buyer is not income as long as the payment is in the nature of a reduced commission and not paid for another reason.

1099’s TO REALTOR®

When a REALTOR® works as an independent contractor rather than an employee of a brokerage company, the brokerage companies may issue an annual Form 1099-MISC to the REALTOR to report amounts paid to the broker. When the REALTOR® agrees to return part of a commission to the buyer or the seller, and this has been structured as a reduced commission or as a credit on the closing statement, the 1099-MISC issued by the brokerage company should reflect only the net amounts paid to the REALTOR® and this amount will be reported as gross income. If however, the REALTOR® received the gross commission and actually returned some to the seller or buyer, the gross amount is reported and the REALTOR® should be entitled to a corresponding deduction.

Due to the complexity of many types of real estate transactions, we recommend that you consult your tax advisor for guidance as to how these transactions may affect your specific situation.

Disclaimer

This information is provided without warranty of any kind. All situations are different and this is not intended to be legal advice. All readers wishing to take advantage of this information should consult their qualified tax or legal advisor. In no event will Graff, Ballauer & Blanski, P.C. or sponsors of this website be liable for any damages, including lost profits, arising out of this information offered on this website.

Michael Blanski, CPA
Graff, Ballauer, Blanski & Friedman, P.C.
847.329.9091 ext. 305