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.
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.
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.
Michael Blanski, CPA
Graff, Ballauer, Blanski & Friedman, P.C.
847.329.9091 ext. 305
Wednesday, September 08, 2010
