Form 1099 Other Income

[NotEasy]

Taxpayer bought a home in 2008. The real estate agent shared a portion of his commission ($4,000) with the taxpayer. The agent issued him a Form 1099 and put the $4,000 in box 3 'other income'.

Tax consequence?

[Davc]

That's not income. It's a reduction in the cost of the house. Line 21 with an offsetting entry of." House purchase rebate".

[Burke]

I agree with Davc.

[Koss]

Economic Substance

I agree with Davc and Burke...

The proof is in the pudding.

Did the real estate agent actually write a check to your client?

I'd wager a small fortune that's not how it went down.

The four grand was backed out of the commission on the closing statement.

Someone over at the real estate agency is smoking something. The real estate agent probably told his tax pro (you know, the neighbor who does taxes in his garage, when he's not fixing lawnmowers) that he cut his commission by four grand in order to close a deal, and his tax guy told him to deduct it as a some sort of expense on his Schedule C, and to issue a 1099-MISC.

The problem is that the agent never received the four grand in the first place, so he can't deduct it as an expense... Someone--either the agent or the broker--doesn't seem to understand that the four grand they "gave up" is not included in their gross income on Schedule C to begin with.

That 1099 should never have been issued.

BMK

[S T]

Closing Statement

Take a look at the closing statement from escrow and you should find exactly what the commissions were and whether or not they were reduced by the $4,000.

However, I do agree with Koss and Davec,it would reduce his cost for selling expenses, not ordinary income. More than likely, the broker never received the full commission and did not issue a check back to the t/p for that amount. You do need to show on the t/p tax return though because of 1099 MISC reporting and reverse with substantiation,(such as a preparer note) as it most definelty will be in the IRS computer, and a
CP 2000 notice will magically appear in about 15 months.

Sandy

[NotEasy]

I agree with Davc and Burke...

The proof is in the pudding.

Did the real estate agent actually write a check to your client?

I'd wager a small fortune that's not how it went down.

The four grand was backed out of the commission on the closing statement.

Someone over at the real estate agency is smoking something. The real estate agent probably told his tax pro (you know, the neighbor who does taxes in his garage, when he's not fixing lawnmowers) that he cut his commission by four grand in order to close a deal, and his tax guy told him to deduct it as a some sort of expense on his Schedule C, and to issue a 1099-MISC.

The problem is that the agent never received the four grand in the first place, so he can't deduct it as an expense... Someone--either the agent or the broker--doesn't seem to understand that the four grand they "gave up" is not included in their gross income on Schedule C to begin with.

That 1099 should never have been issued.

BMK

Thank you for your reply.

I have just checked with the taxpayer. Believe it or not, he said the real estate agent did write a check of $4,000 to him. Does that make the $4,000 taxable income to the taxpayer now? If yes, does self-employment tax come into picture too?

[Koss]

Reality Check

Well, that's interesting...

I still say it merely reduces the taxpayer's basis in the purchase of the home.

The fact that the agent originally received the "entire" commission, and then wrote a check to a buyer, actually explains why he felt the need to issue a 1099-MISC. On this fact pattern, the $4000 is included in the agent's gross income at the top of his Schedule C. And the payment to the buyer is a deductible expense for the agent.

But that doesn't transform it into taxable income to the buyer.

I think Davc had the right idea by backing it out as a rebate.

Sometimes automakers offer "cash" rebates, where you literally do get a check for $1000 or something when you finance the purchase of an $19,000 vehicle. Many people choose to use the rebate as part of their downpayment, but if you already have enough cash on hand for your downpayment, you will actually get a check from the automaker. And that's not taxable income either.

I agree with ST that it needs to be reported somehow in order to avoid an automated notice from the IRS. But I think you can back it out with an explanation.

It's definitely not subject to SE tax. Unlike the real estate agent, your client is not in the trade or business of buying, selling, or brokering real estate. In general, income reported in Box 3 of Form 1099-MISC is not subject to SE tax. It actually says this somewhere in the recipient's instructions for Form 1099-MISC. So that shouldn't be an issue for the IRS automated systems.

BMK

[NotEasy]

Well, that's interesting...

I still say it merely reduces the taxpayer's basis in the purchase of the home.

The fact that the agent originally received the "entire" commission, and then wrote a check to a buyer, actually explains why he felt the need to issue a 1099-MISC. On this fact pattern, the $4000 is included in the agent's gross income at the top of his Schedule C. And the payment to the buyer is a deductible expense for the agent.

But that doesn't transform it into taxable income to the buyer.

I think Davc had the right idea by backing it out as a rebate.

Sometimes automakers offer "cash" rebates, where you literally do get a check for $1000 or something when you finance the purchase of an $19,000 vehicle. Many people choose to use the rebate as part of their downpayment, but if you already have enough cash on hand for your downpayment, you will actually get a check from the automaker. And that's not taxable income either.

In agree with ST that it needs to be reported somehow in order to avoid an automated notice from the IRS. But I think you can back it out with an explanation.

It's definitely not subject to SE tax. Unlike the real estate agent, your client is not in the trade or business of buying, selling, or brokering real estate. In general, income reported in Box 3 of Form 1099-MISC is not subject to SE tax. It actually says this somewhere in the recipient's instructions for Form 1099-MISC. So that shouldn't be an issue for the IRS automated systems.

BMK

Thank you Koss for such a detailed and clear explanation.