Real Estate Broker’s Refund to Homebuyer Not Taxable
A real estate broker representing a home BUYER typically receives part of the sales commissions for his/her services of bring in a ready, willing, and able buyer. The agreement between this broker and the home buyer provides for the broker to refund part of these commissions to the home buyer. Alternatively the broker’s agency permits the buyer to apply the “refund” as a credit towards closing costs, the down payment, and/or a reduction in purchase price. There are two questions in this letter ruling request.
First is the question of whether the refund or credit to the buyer is considered to be income to the buyer. IRS answer is “no.” Section 61 requires all income to be taxable except… Revenue Ruling 2006-27 states a nonprofit corporation that provides down payment assistance towards the purchase of homes to low-income individuals and families is not income, but is a basis adjustment. Revenue Ruling 76-96 states rebates received by buyers and lessees of automobiles do not have income, but have a basis adjustment. Based on these citations, IRS has determined the broker’s refund is not taxable, but is an adjustment in the buyer’s basis in the house.
Second is the question of whether the broker is required to give the buyer a Form 1099 for the refund. IRS again says “no.” Section 6041 requires Forms 1099 to be issued in cases where a taxpayer is paying various items in relation to the taxpayer’s business. However IRS further states “A payor generally is not required to make a return under section 6041 of the Code for payments that are not includible in the recipient’s income, nor is a payor required to make a return if the payor does not have a basis to determine the amount of a payment that is required to be included in the recipient’s income. Therefore the broker is not required to issue a Form 1099 in relation to the refund of the broker’s commissions.
Citation: Letter Ruling 200721013 - - A copy of this ruling can be found at www.irs.gov by going to the Electronic Freedom of Information Reading Room and clicking on 200721013, or by going to www.irs.gov/pub/irs-wd/ and clicking on 200721013. We can also send you a pdf copy attached to an email upon request.
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