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
Thursday, March 11, 2010
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