Income tax on agent's rebate?

We are first time home buyers in
Silicon Valley, CA.

We've been working with a traditional realtor (she's with Coldwell Banker), and have a good relationship with her.

However, we recently came across an Internet based service, ExploreRealty.com, which employs salaried agents who don't get commissions. The way their service works is as follows: After our offer is accepted, they charge the seller the standard 3% commision. They keep $3,500 of this as a flat fee, and rebate the remainder to us, the buyers.

For example, if we buy a $400,000 property they would charge the seller $12,000, keep $3,500, and give us $8,500.

The rebate ($8500 in this example) is payable to us at close of escrow. They can make this rebate in one of two ways:
1. They simply don't charge the seller the $8500 (ie they bill him only $3500), and the seller reduces the property sale price by the corresponding $8500.
2. They bill the seller the full $12,000, and cut us a check for $8500 at the closing table.

We are interested in pursuing option 2, because we want to use the rebate towards our closing costs. (Or, to cover costs immediately after closing since we'll be cash-poor to pull together our downpayment).

Our question regards tax complications to this strategy. Is the rebate in any way taxable? Would the IRS consider it income, and declarable as such? If not the IRS, would the state (California) consider it taxable?
Are there any other gotchas that make this rebate not as attractive as it appears at first blush?

Any advice on these questions is much appreciated.

[HomeGuru]

<BLOCKQUOTE><font size="1" face="Verdana, Arial">quote:</font><HR>Originally posted by sw rodent:
We are first time home buyers in
Silicon Valley, CA.

We've been working with a traditional realtor (she's with Coldwell Banker), and have a good relationship with her.

However, we recently came across an Internet based service, ExploreRealty.com, which employs salaried agents who don't get commissions. The way their service works is as follows: After our offer is accepted, they charge the seller the standard 3% commision. They keep $3,500 of this as a flat fee, and rebate the remainder to us, the buyers.

For example, if we buy a $400,000 property they would charge the seller $12,000, keep $3,500, and give us $8,500.

The rebate ($8500 in this example) is payable to us at close of escrow. They can make this rebate in one of two ways:
1. They simply don't charge the seller the $8500 (ie they bill him only $3500), and the seller reduces the property sale price by the corresponding $8500.
2. They bill the seller the full $12,000, and cut us a check for $8500 at the closing table.

We are interested in pursuing option 2, because we want to use the rebate towards our closing costs. (Or, to cover costs immediately after closing since we'll be cash-poor to pull together our downpayment).

Our question regards tax complications to this strategy. Is the rebate in any way taxable? Would the IRS consider it income, and declarable as such? If not the IRS, would the state (California) consider it taxable?
Are there any other gotchas that make this rebate not as attractive as it appears at first blush?

Any advice on these questions is much appreciated.<HR></BLOCKQUOTE>

Yes, the rebate is taxable because it is considered as income. Some questions to ask this company. What exactly are they going to do in the transaction and are they licensed to sell real estate in the State of California? Will they write up the sales contract, open escrow, receive and review the Sellers Disclosure Statements, arrange the appraisal, home and termite inspection, do a final walk through and appliance check etc**************.....In other words what are they doing that your own Realtor would do for you and more importantly, what are they not going to do that your Realtor would do. You may be paying more money later than you will be saving if the transaction does not go smoothly because you did not use a Realtor or real estate attorney.
You should check with your State real estate licensing office on the rebate scenario.

Ask the realtor if they report the $8500 to the IRS as income or not. That should be a pretty good guide. I don't believe the IRS would consider the $8500 income. It could be money you already had that you're getting back (like a consumer rebate). That isn't income; it's a big coupon. If you've financed the $8500 then it isn't income because you're still going to pay the money back with interest. The last possible way of viewing the $8500 would be as a gift. Gifts aren't income either.

You'll have to check the CA tax laws. Does CA make you refigure your AGI or do you just transfer the number over from the 1040?

You can read more about income in Title 26 US Code, sec. 61.

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This is not legal advice and you are not my client. Double check everything with your own attorney and your state's laws.