What Are Commission Credits to Home Buyers and How Do They Work?
When Agents Kick Back Their Commissions to Homebuyers
Real estate agents who credit their commissions are a somewhat controversial subject, but some agents will kick back all or part of their commissions to buyers to help sales along. Not all agents are willing to part with what they see as their hard-earned money, and not all state laws are on board with the concept, but it does happen.
How Does It Work?
Let's say that an agent has signed a listing agreement with a seller. The seller agrees to pay the agent a 5 percent commission. The agent then agrees to split that commission with a buyer's agent. The listing broker would get 2.5 percent and the buyer's broker would get 2.5 percent.
If a buyer's agent has decided to provide a commission credit to her client, the buyer, that credit is limited to her own commission percentage. She can credit part or all of it, but she can't exceed that 2.5 percent, at least if she doesn't want to come out of pocket to make up the difference.
Agents can't actually pay a commission to an unlicensed person, but they can rebate a portion of their commission to a buyer, sometimes as a closing cost credit, or to pay part of the down payment if the buyer's lender will allow it. Sometimes these credits take the form of gift certificates or even "free" services provided during the purchase process, such as home inspections that the agent pays for. An agent might foot the bill for moving costs.
Some lenders will limit what these credits can end up paying for. You might not be able to accept the money at closing or as part of the closing transaction.
Commission Credits in Dual Agency
Each agent normally represents a single party to the transaction, but when a listing agent works in dual agency, representing both the seller and the buyer, that agent typically receives all the commission. Some listing agents reason that if the buyer had hired her own agent, he'd "lose" half the commission anyway, so the commission credit option might seem a little less unattractive.
But many agents won't work with both sellers and buyers, and it's even against the law to do so in some states.
Sellers Can Influence the Situation
Some agents will negotiate real estate commissions with the seller in advance. A seller might agree to a variable commission rate, so if the agent ends up bringing in the buyer, the commission would be reduced from 5 percent to perhaps 4 percent. The agent earns 5 percent for representing the seller and the buyer in dual agency, and the seller benefits by paying a lower commission.
An agent might be less willing in this case to part with some of his reduced commission by way of providing a credit.
Companies That Offer "Rebates"
In the language of real estate, a rebate is the same thing as a commission credit, and some agencies specialize in offering them. A handful of real estate companies advertise that they'll always rebate part of their commissions to buyers in the hope that these rebates will attract a volume of buyers to compensate for the loss of income.
But many of these discount brokers expect the buyers to do much of the legwork and to interact solely through email and by FAX. They often don't show them properties. They generally don't attend home inspections or explain paperwork when a buyer becomes confused. They typically don't even meet with the buyer until closing—if they even attend the home closing at all.
Are Commission Credits Legal?
Commission credits or rebates are legal in most states—40 in all—and they've even been championed by the U.S. Department of Justice. The DOJ has taken the position that providing these credits promotes a healthy competition among agents.
Nine states don't agree and they do not permit commission credits or rebates in any shape or form as of 2018: Alabama, Alaska, Kansas, Louisiana, Mississippi, Missouri, Oklahoma, Oregon, and Tennessee.
Iowa allows these arrangements only in dual agency situations. It's not legal if two or more brokerages are involved in the transaction.
What About Taxes?
The Internal Revenue Service has also gotten on board to condone commission credits—or at least it has said that these credits don't count as taxable income to the recipient. The IRS has ruled that they're an adjustment to the cost basis a buyer has in her home.
Of course, this basis might contribute to capital gains taxes down the road in some circumstances when buyers ultimately sell. But if you live in the home and meet a few other qualifying rules, you might be eligible for the home sale tax exclusion—the first $250,000 in profit you realize from an eventual sale is tax-free. This increases to $500,000 for some married taxpayers who file joint returns.
Specifically, the IRS stated on Nov. 30, 2006, that:
"...Payment or credit at closing represents an adjustment to the purchase price of the home and generally is not includable in a purchaser’s gross income."
The Bottom Line
These credits can amount to thousands of dollars saved for homebuyers at a cash-sensitive time. Based on a sales price of $325,000, a 2.5 commission split to the buyer's agent would amount to $8,125. The buyer would receive about $4,062 in financial assistance if the agent only offered even half his commission.
At the time of writing, Elizabeth Weintraub, CalBRE #00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.