Buyer broker commission rebates are legal in New York, including New York City, and are generally non-taxable income. Therefore, most buyer agents in NYC typically do not issue a 1099 IRS form when providing a buyer broker commission rebate. In the following article, we analyze the taxability of broker rebates and discuss specific IRS rulings that apply to these rebates.
Are Buyer Broker Commission Rebates Taxable in NYC?
Go Back To Previous PageAre buyer broker commission rebates taxable in NYC?
Generally, buyer broker commission rebates in New York City are not taxable income. In 2007, the IRS issued a private letter ruling on the taxability of these rebates in response to a request for clarification from a national brokerage that offers such rebates.
The IRS determined that a buyer broker commission rebate provided as a payment or credit at closing should not be within the buyer’s gross income. Instead, it is an adjustment to the
home’s purchase price. In reaching this conclusion, the IRS referenced two previous rulings.
Situation 2 of Rev. Rul. 2006-27, 2006-21 I.R.B. 915
This situation involves a non-profit organization that provides down payment assistance to low-income families and individuals purchasing 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 offers rebates to customers who purchase or lease new automobiles.
In both rulings, the IRS determined that down payment assistance and automobile rebates are not within a customer’s gross income. Instead, they are adjustments to the purchase price of the home or automobile.
Will I receive a 1099 IRS form in connection with my rebate?
Regarding 1099 reporting obligations for a buyer broker offering a real estate commission rebate, the IRS has determined that the real estate broker is not subject to 1099 reporting requirements. This conclusion is based on the understanding that “a payment or credit at closing is an adjustment to the purchase price of the home and is generally not included in a purchaser’s gross income.
“It’s essential to note that, since a taxpayer can only petition the IRS on their behalf, this ruling applies explicitly only to the company that submitted the petition. However, the IRS ruling indicates that any payment or credit made at closing is treated as an adjustment to the home’s purchase price and is generally not included in the purchaser’s gross income.
You can find the complete IRS ruling at the following link.
How does a buyer broker commission rebate affect my property’s cost basis?
As a starting point, a private IRS ruling has clarified that buyer broker commission rebates are not taxable income. Instead, they are adjustments to the price of the property.
For example, if you buy a co-op in New York City for $2,000,000 and receive a $40,000 buyer broker commission rebate, this rebate would lower your cost basis for the property. As a result, the IRS would view your effective purchase price as $1,960,000, rather than the original $2,500,000.
Why are buyer broker commission rebates offered in NYC?
In New York City, buyer broker rebates became legal following an investigation by the Attorney General into the high average commission rates charged by brokers. Typically, sellers in NYC agree to a standard total commission of 6%, regardless of whether the buyer has representation.
This means that buyers effectively pay for broker services even if they choose to handle the deal directly without hiring a buyer’s agent. In cases where the buyer has no representation, the entire 6% commission goes directly to the listing agent.
To obtain value and potential savings when purchasing a home, buyers should work with a buyer’s agent who offers a rebate amount. When an agent represents the buyer, half of the 6% commission goes to them.
Under a buyer-broker commission rebate arrangement, the buyer’s agent returns a portion of this commission to the buyer as a cash rebate at closing.
As a key takeaway, buyer broker commission rebates in NYC are generally not considered taxable or reportable income. If you’re planning to buy a home, consider asking for a NYC broker commission rebate.
Written By: Georges Benoliel
Georges has been working in Wall Street for the last 16 years trading derivatives with hedge funds. He has been an active real estate investor for over a decade. Georges graduated from HEC Business School in Paris and holds a master in Finance from ESADE Barcelona.