Generally speaking, NYC buyer broker commission rebates are not taxable.
The IRS released a private letter ruling on the taxability of buyer agent commission rebates in 2007 in response to a petition for clarification from a national brokerage engaged in the provision of rebates.
IRS ruled that a buyer broker commission rebate made through a payment or credit at closing is not includible in a purchaser’s gross income but rather represents an adjustment to the purchase price of the home.
In making the conclusion above, the IRS made reference to the following two previous rulings:
Situation 2 of Rev. Rul. 2006-27, 2006-21 I.R.B. 915
This situation involves a non-profit corporation which engaged in the practice of providing down payment assistance to low-income families/individuals towards the purchase of homes.
Rev. Rul. 76-96, 1976-1 C.B. 23, as modified by Rev. Rul. 2005-28, 2005-1 C.B. 997
This situation involves an automobile manufacturer that pays rebates to its customers who purchased/leased new automobiles.
In both of the above rulings, the IRS determined that the down payment assistance and automobile rebates are not includible in a customer’s gross income but rather are considered an adjustment to the purchase price of the home / automobile.
In regards to 1099 reporting obligations for the buyer broker offering a commission rebate, the IRS ruled that the broker does not have a 1099 reporting obligation because “a payment or credit at closing represents an adjustment to the purchase price of the home and generally is not included in a purchaser’s gross income.”
It’s important to note that because a taxpayer can only petition the IRS on its own behalf, the ruling above only directly applies to the company which made the petition.
However, the language of the IRS ruling does make it clear that any payment or credit at closing represents an “adjustment to the purchase price of the home and generally is not included in a purchaser’s gross income.”
The full IRS ruling may be found here: https://www.irs.gov/pub/irs-wd/0721013.pdf
The private IRS ruling on the taxability of buyer broker commission rebates determined that they are not taxable but rather reflect an adjustment to the purchase price.
For example, let’s say you buy a NYC co-op for $1,500,000 and receive a $15,000 buyer broker commission rebate. The rebate you receive would reduce your cost basis on the property, thereby reducing your purchase price in the eyes of the IRS from $1,500,000 to $1,485,000.
As we explained here, sellers in NYC almost universally agree to pay the same total commission of 6% even if a buyer is unrepresented.
Under this structure, buyers effectively pay for broker representation even if they elect to do a ‘direct’ deal and not be represented by a buyer’s agent. In a case where the buyer remains unrepresented, the full 6% commission goes directly to the listing agent.
As a result, the only way for a buyer to extract value and monetary savings when buying is to work with a buyer’s agent who offers a commission rebate. When a buyer agent is involved, half of the total 6% commission is paid to the buyer’s agent.
Under a buyer broker commission rebate arrangement, the buyer’s agent pays a portion of this commission to the buyer in the form of a cash commission rebate at closing.
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