Dividing the broker co-op, illegal??

[Irvineshopper]

Assuming California property purchase money loan (no refi), there is no recourse by the lender UNLESS they look for loan fraud, then you become liable.

You can walk away from a defaulted loan on a purchase money loan in CA without any recourse for loan deficiency.  However, loan fraud eliminates that benefit.  False loan app, false documents, and receiving funds outside of escrow are all examples.

In this case, you would become liable for the deficiency in the loan.  Now fraud is difficult to prove and under these circumstances, it would be very unlikely that it would be prosecuted.  If the kickback was $10,000 and the loan was $50,000 then it would be a different story.  The amount received is likely minimal compared to a loan.  I wouldn't worry about it in your situation, just some things for others to consider on the board if they plan to do this going forward (learn from my experiences)

I am just very conservative now (as I learned the hard way)

 

[irvinerealtor]

@littlebirdie08 - To my knowledge, the practice is not illegal, and does not constitute loan fraud. If it was your broker's opinion that the practice was illegal, why did he agree ahead of time to the terms that you'd asked for and stipulated prior to your registration?

In the future, I'd suggest contacting either me or trojanman (or any of the other realtors on this board) to get better terms and accountability.

@Marty - can you share your "I learned the hard way" story?

-IrvineRealtor

 

[usctrojancpa]

I have been helping my client to get new home at Sagewood in Pavilion Park.  ( Great Park Neighborhoods )

Does anyone know if Sagewood allow broker co-op credit in escrow?

No, they do not.  Most all builders now do not allow the agent to contribute any portion of their broker co-op in or outside of escrow to their clients (good luck trying to enforce it happening it outside of escrow).  It clearly states this on the broker co-op agreement that the buyer and agent sign. 

 

[usctrojancpa]

Thank you for your suggestion.  After two emails, I got his response
  It is against the law for a broker to share his commission with anyone except a real estate licensee as a party to the transaction. In this case I must pay tax for my whole commission which is $13000. I give you a gift (not a refund) $6500 in which I  will pay IRS  $ 1625 or may be more. $4875 check you received is my pocket money as my gift to you and you don't have to pay tax for it.

I know it is legal here in CA to divide the commission.  Any suggestion on what should I do?

It is definitely allowable as a deduction to the agent on their Schedule C on their tax return.  The buyer has not done any work for the agent for the rebate to qualify as earned income (aka be 1099able).  I've never gotten a call from the DRE.  haha  You do not have to pay tax on the rebate, neither does your agent. 

 

[usctrojancpa]

Yes... even if it was a 1099 situation, it's up to you to pay the taxes not him. He can reduce his income by the amount he paid you so he won't get taxed on the entire commission. How is he calculating how much tax to pull from your share? That's not for him to decide.

Send him the Redfin link too.

The commission rebate is a reduction of the cost basis in the home to the buyer so there is no tax to buy by the buyer when they receive the rebate.

 

[usctrojancpa]

You also have to be careful about loan fraud.  if you took a loan on this property and received money that was not disclosed to the lender, you are at risk, especially if the loan goes into default.  The only way that I would share a commission (as a broker or a buyer) is in escrow, fully disclosed.

Most all new home builders will not allow agents to rebate any portion of their commission into escrow so the only way to do it is outside of escrow.

 

[Chairman]

You also have to be careful about loan fraud.  if you took a loan on this property and received money that was not disclosed to the lender, you are at risk, especially if the loan goes into default.  The only way that I would share a commission (as a broker or a buyer) is in escrow, fully disclosed.

Most all new home builders will not allow agents to rebate any portion of their commission into escrow so the only way to do it is outside of escrow.

If you rebate the whole thing can you not pay any taxes on it then? Will the broker be scrutinized for doing that?

 

[qwerty]

You also have to be careful about loan fraud.  if you took a loan on this property and received money that was not disclosed to the lender, you are at risk, especially if the loan goes into default.  The only way that I would share a commission (as a broker or a buyer) is in escrow, fully disclosed.

Most all new home builders will not allow agents to rebate any portion of their commission into escrow so the only way to do it is outside of escrow.

If you rebate the whole thing can you not pay any taxes on it then? Will the broker be scrutinized for doing that?

if an agents commission/co-op is $15,000 and he gives the whole thing to the buyer (his client) then he would show income of 15,000 and then a deduction of $15,000 so the net is $0, since there is no income there is no tax. i suppose this could draw some scrutiny from the IRS but i doubt it. Perhaps if he showed income of $100K with rebates of 100K it may get scrutiny.  I think most, if not all audits by the IRS are triggered by the system parameters/checks they have (your income on return doesnt tie to the income from W2s/1099s they receive, etc) so a one off of rebating 100% of the commission/co-op i doubt would draw any scrutiny.

 

[usctrojancpa]

You also have to be careful about loan fraud.  if you took a loan on this property and received money that was not disclosed to the lender, you are at risk, especially if the loan goes into default.  The only way that I would share a commission (as a broker or a buyer) is in escrow, fully disclosed.

Most all new home builders will not allow agents to rebate any portion of their commission into escrow so the only way to do it is outside of escrow.

If you rebate the whole thing can you not pay any taxes on it then? Will the broker be scrutinized for doing that?

Just like Qwerty said, if you rebate the whole thing that you don't pay any tax since there's no income.  My broker doesn't really care what I do with my commissions, especially if it's outside of escrow.  His main concern is that all the net commissions go through his broker bank account so he can deduct his transaction fee and wire me the net commission. 

 

[OpenSky]

:

 

[qwerty]

wherein I did the reversing entry in my tax return.

just out of curiosity - what was your reversing entry? when he 1099's you, a copy gets sent to the IRS. So the IRS has it as income unless it is withdrawn.

 

[eyephone]

wherein I did the reversing entry in my tax return.

just out of curiosity - what was your reversing entry? when he 1099's you, a copy gets sent to the IRS. So the IRS has it as income unless it is withdrawn.

Good point - there is no JE to reverse a 1099.

 

[OpenSky]

 

[qwerty]

wherein I did the reversing entry in my tax return.

just out of curiosity - what was your reversing entry? when he 1099's you, a copy gets sent to the IRS. So the IRS has it as income unless it is withdrawn.

Previously, I did two 1099's - one for the broker-issued 1099 ($15,000) and another reversing it (-$15,000), issued from myself, notating the "Reduction in sales price of residence" in the notes.

This was the advice from my CPA.

Of course, now I don't have a 1099 for the sale of my home last year since they aren't needed (on the advice provided above).

that is interesting. i didnt think you could have a negative 1099. So i went into turbotax to my return and put in a negative number and it would say $0, if i put in a positive number it would show the positive number and increase my tax liability.

 

[OpenSky]

wherein I did the reversing entry in my tax return.

just out of curiosity - what was your reversing entry? when he 1099's you, a copy gets sent to the IRS. So the IRS has it as income unless it is withdrawn.

Previously, I did two 1099's - one for the broker-issued 1099 ($15,000) and another reversing it (-$15,000), issued from myself, notating the "Reduction in sales price of residence" in the notes.

This was the advice from my CPA.

Of course, now I don't have a 1099 for the sale of my home last year since they aren't needed (on the advice provided above).

that is interesting. i didnt think you could have a negative 1099. So i went into turbotax to my return and put in a negative number and it would say $0, if i put in a positive number it would show the positive number and increase my tax liability.

there was a way to do it that involved calling TurboTax support. I wish I could recall. I think it involved form entry rather than the wizard.

 

[OpenSky]

 

[qwerty]

wherein I did the reversing entry in my tax return.

just out of curiosity - what was your reversing entry? when he 1099's you, a copy gets sent to the IRS. So the IRS has it as income unless it is withdrawn.

Previously, I did two 1099's - one for the broker-issued 1099 ($15,000) and another reversing it (-$15,000), issued from myself, notating the "Reduction in sales price of residence" in the notes.

This was the advice from my CPA.

Of course, now I don't have a 1099 for the sale of my home last year since they aren't needed (on the advice provided above).

that is interesting. i didnt think you could have a negative 1099. So i went into turbotax to my return and put in a negative number and it would say $0, if i put in a positive number it would show the positive number and increase my tax liability.

there was a way to do it that involved calling TurboTax support. I wish I could recall. I think it involved form entry rather than the wizard.

im guessing you can put negative values but the total cant be less than zero. i just put a negative amount in there since i had no other amounts in the "other income" section and the total would have been a negative.

 

[OpenSky]

8)

 

[qwerty]

wherein I did the reversing entry in my tax return.

just out of curiosity - what was your reversing entry? when he 1099's you, a copy gets sent to the IRS. So the IRS has it as income unless it is withdrawn.

Previously, I did two 1099's - one for the broker-issued 1099 ($15,000) and another reversing it (-$15,000), issued from myself, notating the "Reduction in sales price of residence" in the notes.

This was the advice from my CPA.

Of course, now I don't have a 1099 for the sale of my home last year since they aren't needed (on the advice provided above).

that is interesting. i didnt think you could have a negative 1099. So i went into turbotax to my return and put in a negative number and it would say $0, if i put in a positive number it would show the positive number and increase my tax liability.

there was a way to do it that involved calling TurboTax support. I wish I could recall. I think it involved form entry rather than the wizard.

im guessing you can put negative values but the total cant be less than zero. i just put a negative amount in there since i had no other amounts in the "other income" section and the total would have been a negative.

Gotcha. So start with the positive amount, then offset with the negative, bring to zero, bang - done.

Hopefully you can avoid getting a 1099 altogether using the link provided earlier

oh im not getting 1099d for anything. i was just curious. thanks.

 

[eyephone]

wherein I did the reversing entry in my tax return.

just out of curiosity - what was your reversing entry? when he 1099's you, a copy gets sent to the IRS. So the IRS has it as income unless it is withdrawn.

Previously, I did two 1099's - one for the broker-issued 1099 ($15,000) and another reversing it (-$15,000), issued from myself, notating the "Reduction in sales price of residence" in the notes.

This was the advice from my CPA.

Of course, now I don't have a 1099 for the sale of my home last year since they aren't needed (on the advice provided above).

The proper way to do it, is to contact the person/company who issued the 1099 and tell them to correct and reissue the 1099.

1099 Misc - is used to report income

Hmm - it may be a red flag when you show a negative number on 1099.