Real Estate Buyer Rebates are Legal in California

There are a lot of talk and assertions by some on the internet that it is illegal or unethical for a real estate agent to provide a rebate to a buyer in a real estate transaction. While this is true in some states, it is not for California. For those states that ban such rebates, the Anti-Trust Division of the US Department of Justice (DOJ) is actively working to get those lifted to promote competition in the real estate industry to hopefully reduce costs in all states.

The historical problem associated with rebates in the real estate industry is one of kickbacks to other businesses, such as providing a kickback to a title company or another business to direct business a certain way. Through kickbacks, some agents were able to corner the market and prevent competition. This has been made illegal in all states through the federal Real Estate Settlement Procedures Act (RESPA). With regard to commission rebates to buyers, the issue is one of disclosure.

According to the DOJ and the Department of Housing and Urban Development (HUD), real estate agents may rebate a portion of the agent’s commission under RESPA. The rebate must be listed as a credit on page 1 of the HUD-1 in Lines 204-209 and the name of the party giving the credit must be identified. Real estate agent or broker commission rebates do NOT violate Section 8 of RESPA as long as no part of the commission rebate is tied to a referral of business.

As part of my business model, I provide buyer rebates to my clients when I only represent the buyer in a transaction. What I have found in today’s market is that lenders get a bit nervous when they see a large credit to the buyer from their agent. Thus, it is imperative that as the buyer’s agent to address this issue early with the lender as to how they will feel comfortable on how the credit is to be applied. I typically will credit the rebate toward closing costs and any extra toward the buyer’s down payment. I have found that lenders are happy to see the rebate so long as it does not show up as a surprise at the last hour.

As of this posting, the states that still prohibit rebates are: OR, AK, KS, OK, IA, MO, TN, MS, AL, and LA. Below is a link to the Department of Justice website page regarding rebates.

http://www.justice.gov/atr/public/real_estate/rebates.htm

Are Cash Back Rebates From A Real Estate Agent Income? NO!

In response to a question posed by a home buyer regarding a rebate he was to receive from his agent, someone told the buyer that he would have to claim the rebate on his income taxes and the agent giving the rebate would need to provide the buyer with a Form 1099. The assertion is completely wrong and a ploy used by some agents to discourage consumers from employing an agent that offers a rebate.

According to the IRS: "A cash rebate you receive from a dealer or manufacturer of an item you buy is not income, but you must reduce your basis by the amount of the rebate." For example; if you buy a home for $100,000.00 and receive $1,000 as a cash rebate from your agent, then your basis is $99,000.00 rather than the full $100,000.00.

Where this matters is when you go to sell and you make a capital gain that may be taxed. Following the example above, say you sell the home a few years later for $150,000.00. Without the rebate, your capital gain would be $50,000.00 as your basis is $100,000.00. With the rebate, your capital gain would be $51,000.00 because your adjusted basis is $99,000.00.

The same is true if you receive down payment assistance. According to the IRS: "If you purchase a home and receive assistance from a non-profit corporation to make the down payment, that assistance is not included in your income. If the corporation qualifies as a tax-exempt charitable organization, the assistance is treated as a gift and is included in your basis of the house. If the corporation does not qualify, the assistance is treated as a rebate or reduction of the purchase price and is not included in your basis."

You can go to pages 31-32 of IRS Publication 525 for verification of the above information. The link to Publication 525 is:

www.irs.gov/pub/irs-pdf/p525.pdf

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TIMELINE Real Estate is committed to providing ethical and professional real estate sales services to the general public for a considerable savings. It is our mission to develop a real estate business model that will allow consumers to save large sums of money when buying or selling real property while providing the most professional, informative, loyal and dedicated service in the industry. The best interests of our clients will always come first and we will place the clients’ concerns ahead of our own in each and every transaction, as we are dedicated to the development of long-term client relationships. We will foster a team-approach philosophy to ensure that every client’s needs are important to each and every member of our organization.