Commission Rebates

[Chris Coughlan]

Hello,

I'm assisting my clients (friends) purchase their first home. I would like to give them a portion of my commission to help them out. I know I will need to contact my attorney and accountant but was wondering if anyone has experience offering commission rebates? It sounds like I have a couple of options.

http://www.justice.gov/atr/public/real_estate/rebates.html

My brokerage said that I can rebate a portion of my commission. They said that they will mail my client a check after the closing as long as I filled out a fee disbursement form detailing how much and who gets what. They said that I will not be taxed on the rebate portion.

"According to the DOJ and the Department of Housing and Urban Development (HUD), real estate agents may rebate a portion of the agent's commission under RESPA. The rebate must be listed as a credit on page 1 of the HUD-1 in Lines 204-209 and the name of the party giving the credit must be identified. Real estate agent or broker commission rebates do NOT violate Section 8 of RESPA as long as no part of the commission rebate is tied to a referral of business."

Does anything need to be filled out on the HUD if an actual check is being mailed to my clients rather than being a credit? Sounds like they won't be taxed if it's a credit, but what about if they receive a check?

I have also read that some people have, "Reduced the purchase price of the home by the commission rebate - The commission rebate is noted on an addendum that both buyer and seller will sign."

If I want to give my clients 3K, reducing the purchase price of the home by 3K affects the commission of the listing agent (who won't be happy). How does this work?

Thanks,

Chris

[Bryan Scott]

Hi Chris,

Just wondering how this worked out for you in MA? Notwithstanding IRS code dealing specifically with such rebates (check with your Real Estate proficient CPA), in Colorado, it's pretty straight-forward. The real key is advance notification to the buyer's lender as the underwriter will have it's own rule book in this regard. Next, is to make sure the rebate is fully disclosed to both sides of the table. This does not have to be as formal as a signed disclosure statement, but then again, that depends on the underwriter. As well, if you are licensed as a RE Agent, your Broker may or should have an office policy papering this type of transaction. In any case, I have done this where the interest rate was bought down (PPD interest), another where the purchase price was reduced (requires a new Amend/Extend to the CBS contract), another where the buyer needed to repair the roof and paint the exterior, but did not want to come out of pocket, so a repair escrow account was established for this purpose. Just know that it is not likely that the buyer will actually pocket any of the cash from such a rebate. As well, if they are obtaining new financing for their purchase, the underwriter may not allow any of the above. In any event, if it is allowed (most are), it must appear on the HUD-1 settlement statement, otherwise it could be considered Mortgage Fraud. BTW - so far as tax treatment, subject to further review by your CPA, the amount of the rebate will likely be just a reduction in Cost Basis, which is nearly always muted by the fact that the code allows a certain amount of tax-exempt gain from sale of a personal residence. That said, though the buyer must receive a 1099 for the rebate amount, it usually won't become a part of their adjust gross income.

Sorry about the novel. There are a few moving parts to these. Best of luck.