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.