The Taxman Does Not Cometh

With tax season upon us, folks have been asking and analyzing and holding forth about whether our refunds are taxable as income.

We recently got an answer from the IRS that commission refunds are not taxable.

This means that when you buy a $1 million dollar house from Redfin and get a $19,500 commission refund — Redfin refunds 2/3rds* of whatever commission it earns, with an average refund last year of 1.952 percent of the final home price — that money is not taxable.

“A payment or credit at closing from [Redfin] represents an adjustment to the purchase price of the home,” the IRS ruled, “and generally is not includible in a purchaser’s gross income.”

The IRS cited its own history of letting car-buyers keep rebates, and of providing relief to home-buyers.

Prior to petitioning for this guidance, we were flabbergasted to learn from our accountants that there had been no formal IRS ruling on the subject. Other brokerages offer commission refunds, but typically in amounts smaller than the closing costs, so distributions were apparently rare. In our case, we regularly refund amounts well in excess of closing costs, issuing checks to virtually every customer. Since no ruling existed, we paid Grant Thornton $10,000 to file the petition.

Because you can only petition the IRS on your own behalf, not that of others, we could not ask the IRS to rule on the tax situation of each of our clients, only on whether we were obligated to report our refund as income. The IRS was also careful to say that a ruling on Redfin’s commission refund could not be used as a precedent for other brokerage’s commission refunds (though we don’t see why not).

For all that, the ruling was unambiguous: the IRS not only ruled that our refunds are not taxable income, but also was fastidious to say that a home-buyer could not pay taxes on money not included as income, or even acknowledge the refund in the return when Redfin was not obligated to provide any reporting on that refund.

The final line in the IRS letter, about including a copy of the letter in a tax return, applies to Redfin, not our customers.

*Note: At the time this post was written, our rebate was 66%, or 2/3rds of our commission. We changed our rebate from 66% to 50% in November, 2008.


  • Athol Kay

    Well I’m glad that’s all sorted out then. It’s certainly common sense to ask “is this taxable?” anytime you get get a five figure check. Well done on being pro-active on this issue.

    • Anneswong1

      Does Redfin pay the buyer a check issued by Redfin (not seller or title company) after closing and it does not appear on the HUD-1? Then who is paying the tax on that money if the buyer is getting it tax free? The commission was deducted by the seller as selling expense and it’s income to Redfin. So does that mean Redfin is paying the income tax on it and giving the buyer the rebate?

  • Athol Kay

    Gah.. I meant to ask. Does the rebate appear on the HUD-1? Does it have to be disclosed to the lender?

    What do you guys to to protect everyone involved from accusations of mortgage fraud? And NO I am not accusing here, just asking the question.

    Redfins rebates are as you point out unusually large and seem to be breaking new ground in needing clarification from the government.

  • Jonathan Dalton

    Here’s a question, Glenn. If the IRS views the credit as “an adjustment of the purchase price of the home,” what does that mean for appraisals in the areas in which your buyers buy?

    For instance, if someone pays $350,000 for a house and receives a 2/3 rebate of the co-broke, does that then mean the home is only worth $343,000 when an appraiser uses it as a comp?

    I’m absolutely delving into minutiae but the wording and/or logic the IRS is using seems a bit, well, odd.

    Here’s one more … does this then mean that the buyers’ tax basis once they sell actually is $343,000 per the IRS and not the $350,000 purchase price? In the IRS’ eyes, have they already locked in a gain equivalent to the rebate because of the “adjustment” to the sales price.

    Neither of these really are Redfin’s problems, I know, but they sprang to mind nevertheless.

  • http://littlepinkhouses Cathy Jager


    What does Coldwell Banker do to protect participants in its Real Estate Advantage Programs, such as the one for Harvard faculty, against allegations of mortgage fraud? What does Cartus, another Realogy company, do?

  • Cathy Jager

    To clarify, what do Coldwell Banker and Cartus do with to protect participants in their buyer cash back rebate programs?

  • Athol Kay

    Cathy if you want to be my personal forum troll fine, but at least stick to trolling on my blog and not on other peoples.

    I already posted my second post correcting my position and being I thought quite complimentary towards Redfin BEFORE you laid into me on your blog about my first post.

    I also had similar thoughts Jonathan.

  • Steve Tomaszewski

    Chicago, Il., I am a real estate agent with a mortgage background.The deals cut in the backrooms of a “Friends” real estate company or a friendly realtor are NOT dirty little backroom secrets.Its an epidemic. The aging realtor average is 59 years old and female,the husbands retired, home is paid off, kids in/out of college.Now if they make 20k-30k a year thats all gravy. Finally companies like started advertising 1% rebates to new homebuyers and have been quite successful. The normal rebate paid back to listing family or buyers family is approximately 1/2 the commission minus 30% tax .In example on a 300k listing at 3% is 9k. Now after the closing the listing agent, on 100% payout, gets $8500.00 after fees. Then splits 50% to seller gross $4250.00 minus proposed taxes.Generally the seller may receive back $3000.00 SO most listin agents offer a standard “VERBAL” rebate of $2,500.00 Now since such rulings are noticed buy IRS rulings the legitimate rebate in print will just bring the backroom to the billboard.Their will allways be full service brokers just like full service restaurants, Mortons, Shula’s, Shaw’s. And those who go to the store, pick out the main course, prepare and serve.In this case rebate realty companies are like having a good friend who gives you a 50% discount at a 5 star restaurant!
    Steven Tomaszewski-Chicago

  • Nick Davis

    In my opinion, if the buyer incurs a capital gains tax because the home was sold within 2 years, then yes the sales price would be adjusted because of the Redfin rebate.

    With respect to the HUD-1, the rebate should only be recorded on the HUD if it is used for settlement charges. That is what HUD/RESPA told me.

    The Maryland Real Estate Commission has a similar opinion.

  • T Morones

    I feel sorry for the consumer, buying a house is not the same as buying a book or trading stocks on line. Redfin is treating the complex and somewhat litgious world of real estate as kids play. Once this concept implodes the consumer will once again get burned. The lawyers will benefit in the end once the lawsuits begin.

  • T Morones

    I feel sorry for the consumer, buying a house is not the same as buying a book or trading stocks on line. Redfin is treating the complex and somewhat litgious world of real estate as kids play. Once this concept implodes the consumer will once again get burned. The lawyers will benefit in the end once the lawsuits begin.

  • Stephen Graham

    Kids play?

    You act as though the consumer can?t make his/her own informed decision. There are many savvy home buyers who understand fully how a real estate transaction works and thus seek out a rebate of commission. It?s our job, as professionals, to present to the consumer all options. We then consult with the consumer as to the pros and cons of said options. The consumer then makes his or her own decision.

    Stephen Graham

  • Tax Man

    I am very wary about this whole situation, how do know the attorney they paid for the petition didn’t cook something up. The supposed ruling looks like somethign done on a typewriter. For starters, the format is not in line with what the IRS sends out, yes it looks similar, but there variations. It is also lacking a barcode to track the ruling notice, and most alarming of all, it does not have the IRS logo, and it came from Washington D.C. any seasoned tax pro knows that the IRS does not have a service center in D.C.

    Oh forgot to mention the disclaimer, according to that, this only applies to Redfin, why people would try to use this as tax advice has me bewildered. Consult directly with the IRS, you don’t need to pay an attorney to write a pettition contact your local IRS office and ask for written clarifaction concerning a matter, saves you a truckload of money and then you can get your correspondance from the IRS. If you happen to get audited, provide a copy of your correspondance to you or your company and watch how easy the audit is.

  • Pamela Mullen

    Commission is paid to agents at the closing of a home, they recieve the money which is then tax due income to the agent/broker; 2/3 of the received money is then refunded to the buyer after closing; (it has to be refunded after closing because as it is not available to agents/brokers until the home closes meaning funds are transfered from buyer to seller) if received after closing the money is not available to buyer’s for closing costs. If money is sent to buyers after closing that money is income/gain to buyers and should be taxed like any other income. If the money is from the broker’s account then the broker has received the money and owes tax. If the buyer receives money from the broker, the buyer owes taxes. By giving the buyer 2/3′s of 3% of the purchase price of a property Redfin is saying to the buyer; you just paid 2/3′s of 3% more for this home than the actual value of that property. If the home is actually worth 2/3 of 3% less, then why not just pay that much less for the home, lower your closing costs, cut out everyone’s playing around with unearned money and avoid the risk of owing tax on the inflated home value? Why is failing to pay tax on unearned income received represented as a positive thing? Is there any chance that the IRS may come back on these individual buyers with a determination of tax owed for money received from agents/brokers after closing? Nation wide this must be millions of unpaid tax dollars, usually the IRS does not give up that kind of money, why is this any different? Why not just pay the real and fair price for the house and everyone just pays the tax they owe and be done with it?

    • Anneswong1

      I agree with you. Did you ever find out the answer to this?

  • Bob

    The ruling is legit – check out the IRS website

  • PlanOpen

    Love the costume!

  • WSK

    Thank you for posting the IRS ruling on your blog. Unlike the IRS agents that I consulted on this issue in multiple telephone calls, It was very helpful last year in deciding how to deal with this issue when preparing my taxes.

  • Anders

    But does the refund create taxable income to Redfin in the full amount or just their undistributed portion that is kept by Redfin?

  • jDeppen

    I would assume that this is similar to refi money not being taxable. It’s a loan not income, the buyer is paying it back.

    If it’s a cash deal then it’s the buyer’s money being returned.


    • Anneswong1

      ok. if Redfin received the commission for services, how can it be a return of capital? Only the seller can refund money back to the buyer. Not the agent, the service provider.

  • Andy

    This is the new big revenue deal for the IRS.
    I talked to my IRS agent about this as it came up in an audit! I am I real Estate Agent, I just went through an Audit for 2007-2009. I had refunded a few clients part of the commission, one was $3500 and 5 others were between $2000-$3000. At that point I did not have to send out a 1099 to them but the agent said that they were to report that money as ordinary income. With the new rule about1099s, anyone that you pay more than $600 you MUST 1099 them. I’m sure that Red Fin does NOT report the refund of commissions to the IRS as income to them and pay the Tax. So if you receive a check in cash from Red Fin or any Real Estate deal and it is not part of a reduction on price you will have to report that as income. It is like the banks that will give you a 1099 for a short sale, as they report that as a loss and so you have to pay their loss as income. So far the IRS is not going after Primary residences for the loss but a friend of mine just received a 1099 for 2 rentals he sold short for $120,000 he will owe tax on that of $36,000. I was told that the IRS has just hired 20,000 new audit agents to go after Real Estate related taxes as the banks have taken HUGE tax losses. And from what I was told by my IRS agent “if you receive Cash back from any Real Estate Commission that the agent writes off as an expense you will owe ordinary income tax on it” and I don’t know of any agent that is going to pay income tax on money they don’t receive! They have to send you a 1099 for it starting in 2010 tax year I think but 2011 for sure. They are getting aggressive about it. So if you receive a check from your Real Estate agent I would seek advice from a CPA and save a few bucks for the tax, and all so see if it pushes you into a new tax bracket. A great way to get the max out of your refund is to reduce the price. Believe me the IRS is ruthless with this and it was really not fun. I have offered to my clients that I did give cash back to pay any penalties, but so far they have not been targeted! But believe me I will be sending out 1099s from now on.