Sometimes it is the simple transactions that are overlooked.
In the typical real estate sale, a person selling a piece of real estate will generally agree to pay a commission to their real estate agent. The real estate agent will then pay a portion of this commission to a second real estate agent who produces a ready, able and willing buyer (the buyer’s agent). At the real estate closing, the buyer’s agent will usually pay or credit the buyer with a portion of the commission that the buyer’s agent received.
In PLR 200721013, the IRS recently confirmed that the payment or credit in this common transaction is treated as a purchase price reduction and not as taxable income. As a result, the buyer does not have to report the income on his or her tax return and the buyer’s real estate agent does not have to send the buyer a Form 1099 to report the transaction.
I have noticed that IRS examiners do not fully understand this issue. I can’t help but wonder if IRS auditors might start looking for this, given the IRS recent push to crackdown on taxpayers who inflate the cost basis of their stock portfolio holdings to minimize their income taxes associated with their traditional stock sales.