Thread: Paying Tax on Buyer Contribution

I'm not a tax professional; however, I believe as this is a legitimate business expense (you had to contribute the $$ in order to get the sale), it's a above the line deduction.

I doubt it's something that turbotax or other tax software is going to help with and unfortunately probably is going to require a CPA's knowledge.

Originally Posted by RealQ

I know what when a real estate agent contributes x amount of his/her commision toward the buyer's closing cost, he/she still is responsible for paying the tax of the full 3% commission regardless if it was contributed to the buyer's closing cost on the HUD-1 statement.

Not true. You only pay tax on the money you get paid. Money you contribute to the sale is not money you get paid. Plus, if you work for a broker you won't be getting the full commission. They get their split and you get yours. You only pay taxes on your split. If this is not how it works with your company, then you need to find another company.

Originally Posted by RealQ

The question is: What should a real estate agent do on the tax return, to tell the IRS that it was a buyer's contribution. I see websites like ZIPrealty that will do 2% cash back. How is the agent making money after taxes?

This money won't show up on your 1099 so the IRS will have no knowledge of it so there is nothing to tell them.

Thank you for the replies. My broker said that they (the brokerage) have to report the fill amount even if it is a contribution to the buyer. The IRS put a stop to not taxing the contribution (which is comes from commission) because people would give the percentage to the buyer and then get it back without paying tax on it.

So the question is, if it is a contribution, would be be "the cost of doing business." I cannot issue a 1099 to the buyer because that would probably raise a red flag very quickly.

If the buyer is credited the money in the transaction at closing and it is on the HUD then your broker never touched the money and there is no reason to 1099 it. If it happens this way and your broker still 1099s you for the money, your broker is doing it wrong

If you are giving the money to the buyer outside of the transaction and it is not on the HUD then original amount goes to your broker and you get a 1099. Money given to the buyer outside of the closing is illegal and constitutes loan fraud. Be careful.

That makes a lot of sense. I have to fill out a "funding data" sheet after I have a contract, and the funding data sheet tells the story of how much the total commission minus contributions to buyer, and insurance, etc. (disbursement). My broker insist that she has to, by law, report the total commission received minus internal brokerage fees. She even said one agent was "surprise" whena he/she found out that they had to py tax on the contribution to buyer.

I see that both ways make sense - not taxing or reporting on 1099 when it is a contribution, and taxing it because it is consider a "gift." But seller contribution is not taxed, right? So my broker's line of reasoning is flawed.

Could anyone confirmed what their broker is doing with the contribution to buyer funds?

I own my company and I already told you. If it is on the HUD then it is not disbursed to your broker so there is no need to declare or pay tax.

Are your buyer contributions on the HUD?

Yes. I see your point. Thanks. I debated the same point with my broker. I may have to choose another broker in the future.

Thanks,
RealQ

If you have an allowable expense, and you SHOULD ask a CPA, you can and should expense it on your schedule C.

Generally speaking, any monies paid in the normal course of operation of your business, is an allowable expense.

All monies you received by the operation of your business, especially those documented on a 1099, must be listed as revenue.

If your commission was offset due to your contribution, and your 1099 did not reflect that, you should issue a 1099 Misc to the person or entity you paid that money to. Don't forget to, also, send the IRS a completed form 1096 (Annual Summary and Transmittal of US Return Information) along with a copy of the 1099 and the recipients information. This must be sent before Jan. 1 of the year following the payment.

Hope this clarifies this for you.