RE sale incentive

[rfk]

Hello,

I am wondering in regard to a "kickback" for lack of better word, as to whether it is considered income, and I am presuming not a deduction to the seller of the property (a Schedule C situation).

My client (the seller) kicked back $10,000 to the buyer as an incentive to close a property. How should this be treated on a Schedule C situation. It is already incorporated in the consideration price of $263,000 -- labeled under miscellaneous -- repairs for buyer, but of course not really repairs. Title company listed it as repairs for satisfying loan structure.

In summary, this seems to be a reduction in price to the seller, but want to see if it is part of consideration. How have others handled this?

Any comments would be appreciated.

RFK

[Snaggletooth]

It's a Deduction

I believe a kick-back paid out to be a deduction. A broader question might be whether the seller wants to show this as a deduction if it is under-the-table.

Another ongoing question might be whether any taxpayer is FORCED to report a deduction.

[OtisMozzetti]

Reduction in sale price

As I see it, the "kickback" payment represents a reduction in the selling price, at least for income tax purposes. There may be other actors, such as lenders, real estate agents, county property tax assessors, and so on who say that such a payment has to be dealt with in some different way.

[rfk]

Thanks for your answers

Thank you.

I am just going to reduce the sale price.

RFK

[Nashville]

Be Careful

Although I agree that paying a "kickback" may be reported for accounting purposes as an offset to sales (instead of a deduction), be careful.

If this is real estate, be advised that you are overwhelmingly likely to be on the hook for reporting the transaction at its full contract price. In fact, your client is 50% likely to get a 1099-S at year end which FORCES the seller to report the sale at full contract price.

Don't let someone else's problem be YOUR problem.

[Burke]

Title company listed it as repairs for satisfying loan structure. Any comments would be appreciated.RFK

In other words, the buyer, seller and title company just committed bank fraud to get the buyer financing.

[Bees Knees]

If the kickback is illegal, it is not deductible.

Pub 535:

Kickbacks. A kickback is a payment for re-
ferring a client, patient, or customer. The com-
mon kickback situation occurs when money or
property is given to someone as payment for
influencing a third party to purchase from, use the
services of, or otherwise deal with the per-
son who pays the kickback. In many cases, the
person whose business is being sought or en-
joyed by the person who pays the kickback is not
aware of the payment.

For example, the Yard Corporation is in the
business of repairing ships. It engages in the
practice of returning 10% of the repair bills as
kickbacks to the captains and chief officers of
the vessels it repairs. Although this practice is
considered an ordinary and necessary expense
of getting business, it is clearly a violation of a
state law that is generally enforced. These ex-
penditures are not deductible for tax purposes,
whether or not the owners of the shipyard are
subsequently prosecuted.

True, the above quote is referring to a third party kickback, but I think the principal is the same. If the kickback to the buyer is done to somehow fool the lender, it is fraud and illegal. The kickback is non-deductible, regardless of whether or not the law is enforced.