While Rebates from Real Estate Agents Are NOT Taxable Income, What If The Agent Issues A 1099?

Recently, a question was posed to me by a buyer after receiving an IRS Form 1099-MISC regarding a rebate she received. The question was whether she had to pay income taxes on the rebate. As I posted on this issue in March 2010, NO! A rebate received from an agent is not taxable income. Rather, the rebate should be applied to reduce your cost basis, which will affect your capital gains tax you may have to pay when you sell. Please see my earlier post for more details. Also see pages 31-32 of IRS Publication 525 at www.irs.gov/pub/irs-pdf/p525.pdf.

So what happens when the agent pays the rebate outside of escrow and sends you an IRS Form 1099-MISC? First, I believe that the 1099-MISC was made in error and could adversely affect the client's taxes by convincing them they must pay taxes on the rebate or cause the client to be audited. Interestingly, the IRS has issued an opinion letter in February 2007 on this very issue at the request of a large real estate firm that offers rebates. The IRS's conclusions of law are as follows:

FACTS (Paraphrased): A buyer purchased a home through a broker who sent the buyer a check rebating a portion of the commission earned, which was paid by the seller in the normal course of business and per local MLS rules. The buyer's agent was an exclusive agency. The questions raised are: 1) Is the rebate taxable income; and, 2) Must the broker providing the rebate issue a 1099 to the buyer?

ISSUE 1: Payments (Rebates) or Credits are Not Taxable Income

Section 61 of the Internal Revenue Code (Code) provides that, except as otherwise provided, gross income means all income from whatever source derived.

Situation 2 of Rev. Rul. 2006-27, 2006-21 I.R.B. 915, involves a nonprofit corporation that provides down payment assistance towards the purchase of homes to low-income individuals and families. The ruling holds that down payment assistance received by a home purchaser represents a rebate or an adjustment to the purchase price, and, as such, is not included in a purchaser's gross income.

Rev.Rul. 76-96, 1976-1 C.B. 23, as modified by Rev.Rul. 2005-28, 2005-1 C.B. 997, involves a manufacturer of automobiles that paid rebates to its retail customers who purchased or leased new automobiles. The ruling holds that a rebate is not to be included in a customer's gross income; but rather, represents an adjustment to the purchase price of the automobile.

In the present case, a payment or credit at [or after] closing from the [broker] represents an adjustment to the purchase price of the home and generally is not includible in a purchaser's gross income.

ISSUE 2: Information Reporting Obligations

Section 6041 of the Code requires all persons engaged in a trade or business and making payment in the course of such trade or business to another person, of rent, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable gains, profits, and income of $600 or more in any taxable year, to file an information return with the Internal Revenue Service and to furnish an information statement to the payee.

Section 1.6041-1(a)(2) of the Income Tax Regulations provides that the return required by section 6041(a) of the Code is made on Forms 1096 and 1099. Section 1.6041-1(c) provides that payments are fixed when they are paid in amounts definitely pre-determined. Income is determinable whenever there is a basis of calculation by which the amount to be paid may be ascertained.

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.

In the present case, [broker] does not have an information reporting obligation under section 6041 of the Code because, as concluded above, a payment (rebate) or credit at [or after] closing represents an adjustment to the purchase price of the home and generally is not includible in a purchaser's gross income. Nor does [the broker] have an information reporting obligation for those amounts under any other section of the Code.

In conclusion, real estate agent rebates are not taxable income and any agent that provides them should not be filing any IRS reporting forms. I suggest to any buyer who receives a 1099, or any other IRS form, that seems to identify a rebate received as income to immediately send a letter to the broker demanding that form be withdrawn or corrected. The broker, when preparing their taxes, should be deducting the rebates from their gross income.