Real Estate Purchase Price Reduction

Published Categorized as Real Estate
Real Estate Purchase Price Reduction, Houston Tax Attorney

The term “income” is broad. It includes just about any money or gain that a person receives. There are exceptions, however.

Take the purchase price reduction. Assume Party A sells property to Party B for $100. Party A will likely have a gain on the sale. The gain is income and may trigger income tax.

But what if Party A sells property to Party B for $50 and Party A pays Party C $50 to provide a service to Party A? Does Party A still have $100 of income for tax purposes? Does Party B have $50 of income?

The answer as to whether there is a purchase price reduction or income is not all that clear. The IRS addresses this in PLR 200721013.

Facts & Procedural History

This ruling request involves a common situation whereby a buyer’s agent credits part of his commission to the buyer. The transaction works like this:

  • A person selling a piece of real estate (Party A) 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 (Party C) who produces a ready, able and willing buyer (the buyer’s agent). 
  • At the real estate closing, the buyer’s agent may pay or credit the buyer (Party B) with a portion of the commission that the buyer’s agent received. 

These are the facts the IRS considered in the ruling request. The question is whether the commission rebate is taxable to the buyer.

Gross Income vs. Gifts

Gross income is defined in Section 61 as income from any source. The courts have said this is any accretion to wealth.

The ruling cites Section 61 and then addresses Rev. Rul. 2006-27, 2006-21 I.R.B. 915. Rev. Rul. 2006-27 deals with nonprofits who provide first-time homebuyers with assistance making down payments on houses. The ruling concludes that down payment assistance is a purchase price reduction.

Rev. Rul. 2006-27 is based on Section 102. Section 102 provides that the value of property acquired by gift is excluded from gross income. A gift “proceeds from a ‘detached and disinterested generosity,’ . . . ‘out
of affection, respect, admiration, charity or like impulses.’”

It would not seem that the intent to make a gift is as clear with the present facts. The buyer’s agent is presumably a for-profit business. There may not have been a detached and disinterested generosity involved. It may have been a requirement or expectation for the buyer’s agent to get the deal or to be able to complete the transaction.

The ruling goes on to cite Rev. Rul. 2005-28, 2005-1 C.B. 997. Rev. Rul. 2005-28 is closer. It involves rebates to customers who purchased cars. The rebates were offered by car manufacturers.

In PLR 200721013, the IRS 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 did not have to report the income on his or her tax return and the buyer’s real estate agent did not have to send the buyer a Form 1099 to report the transaction. 

The Takeaway

Purchase price reductions can arise in any number of situations. Taxpayers should seek out tax advice about these transactions. This can help ensure they are not paying taxes that are not due. With careful tax planning, taxpayers may be able to avoid paying income tax using purchase price reductions.

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