CALIFORNIA BUYER REAL ESTATE REBATES - NEW HOMES
Are buyer rebates for new home construction in California legal, and what are the steps to obtaining a rebate when purchasing a new home?
InformationFast.net has found that as long as certain steps are followed by a cooperating Real Estate broker in California, the rebate of part or all of a real estate commission to a buyer is legal.
James Smith, the Broker/Owner of California Magic Real Estate in Vallejo, agrees, so long as it is disclosed.
"Don't let all the naysayers try to scare you. Every time rebates are brought up here all the talking heads come out to tell you that it's fraud, coercion, violation etc. In California it is perfectly legal for an agent to share their commission with a client. It does need to be disclosed and your lender should be aware of it. However, if you are doing a conventional loan with at least 20% down, your lender doesn't care. If it's an FHA loan no money should change hands outside of escrow."
Yes, if you're not a broker then you have to get your broker's permission.
The naysayers here have a vested interest in spreading false information to preserve the 6% commission. Happens every time the subject is broached.
I have been Rebating on and off the HUD since 2004 just like hundreds of other Agents throughout the country have been doing. I have a contractual arrangement with my Client (also a Principal in the transaction) and if I cannot give all of the rebate on the HUD, then my Client will receive their money after closing....period. There is no Lender or DA in this whole country that is going to call this exchange of money a "kickback" nor "fraud". It is simply a lowering of the cost of my services. These people (Lenders and Cops) understand this. That is why you have NEVER heard of an agent that gives rebates dragged into court (except possibly in Realtor Controled States where it is illegal). Unhappily many Real Estate Agents do not understand the concept and continue to spew out their "illegal illegal" misinformation. BTW...I quit sending out 1099's this year. I feel bad about the previous years that I have sent out 1099's. Some of my Clients may have paid taxes not owed.
As to Angela White's argument....I've seen Agents that made no commission at all (volunteers) and do excellent work. I have also seen the top producing outfits in my town consistently make millions collecting so called full commissions while at the same time pulling the wool over the consumer's eyes making them think they were getting the best representation while the Broker's basic business models are designed to maximize profits while putting their clients at risk. Most Seller's and Buyer's do not understand Agency Relationships and many Brokers like it that way. So my argument here is... that no one can look at a commission amount and determine what kind of representation a real estate Client is going to receive. In my case, I work with very informed Buyers that usually know the market better than I do. They hire me to do specific work for them. Their level of representation never goes down. The amount of service I give reflects what I charge them. Takes less time....I charge less money....real simple. I'm happy...they're happy. This is the future of real estate....consumers are getting hip to this old school real estate crap that the big outfits are still trying to pull. THE GATE KEEPERS. We as Agents have the obligation to help the consumer understand that they are the bosses and don't have to cower to us anymore. Walk through those gates....those chains and locks that you see on them....they are an illusion! Stuart.
After doing some research on this important issue, I learned the following and must add to my previous post. 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. I must assume that a 1099-MISC was issued rather than a 1098 as a 1098 is something entirely different and would not apply in this situation. I found that the IRS 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.
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 RESPA. With regard to commission rebates to buyers, the issue is one of disclosure.
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