IRS Says Commission Refunds Not Taxable!!!

Many of you have asked us in the past:

“So when I get my commission refund in form of a check after the closing, am I taxed on this as income?”

The Answer: No, you are not.  Commission refunds given from to you are not considered taxable income.

While we are pretty good at math and very good at giving our customers back big checks at closing…we are not accountants and don’t mean to give any tax advise.  Please read below on a favorable ruling from the IRS in which Redfin (one of our fav’s) got in their request.

IRS Rules That Redfin Does Not Have to Report
Commission Refunds as Taxable Income

SEATTLE – March 7, 2007: Online real estate broker Redfin Corporation today announced a ruling from the U.S. Internal Revenue Service that Redfin does not have to issue Form 1099 to customers that receive commission refunds because such amounts generally are not taxable as income. Redfin is notifying all of its home-buying customers by mail that the company will not report their commission refunds to the IRS.

Redfin Direct combines an e-commerce application with the services of a local, experienced Redfin agent who handles home tours, pricing advice, offer presentation, negotiations, inspections and the closing process. Home-buyers who can find a home to buy on their own get two-thirds of Redfin’s commission refunded at closing.

Across Washington and California, Redfin’s average commission refund is more than $10,000. Redfin customers typically apply their refund to closing costs, which include loan fees, local property taxes and escrow-related costs as well as an initial mortgage payment. As the commission refund usually exceeds closing costs by thousands of dollars, Redfin often issues its customers a check for the excess.

Prior to Redfin Direct, commission refunds in excess of closing costs were relatively rare, and no ruling existed as to whether such amounts were required to be reported on Form 1099. Accordingly, Redfin petitioned the IRS in November 2006 for a ruling, which Redfin received from the IRS last week.

Because an individual or corporation can only petition the IRS on its own behalf, Redfin could only seek a ruling to clarify its own reporting obligation, not to address the individual circumstance of each customer’s tax return. The ruling does however state that “a payment or credit at closing from [Redfin] represents an adjustment to the purchase price of the home and generally is not includible in a purchaser’s gross income.’

In support of its ruling, the IRS cites guidance addressing a non-profit’s down-payment assistance to low-income families buying houses or a manufacturer’s rebate on a car, neither of which are taxable. The full text of the ruling is available on Redfin’s blog.

“Seeking a ruling from the IRS is not an insignificant undertaking,” said Redfin VP of Real Estate Operations David Wilner. “Rather than having hundreds of customers make inquiries with the IRS on a case-by-case basis, we felt it was the right thing to do as part of our commitment to supporting customers through every phase of the home-buying process from offer to close and beyond.”

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