Some agents will kick back all or part of their commission to buyers to help sales along. Not all agents are willing to part with what they see as their hard-earned money, though, and not all states allow it. Real estate agents who credit their commission are a somewhat controversial subject.
Learn more about this practice, how it works, and whether it's legal in your state.
- Some buyer’s agents will rebate part of their commission to the homebuyers they’re working with.
- The rebate can take several forms, including closing-cost credits or free services.
- Commission credits are legal in 40 states.
- The IRS doesn’t count commission credits as taxable income.
How Commission Credits Works
Suppose that an agent has signed a listing agreement with a seller who agrees to pay them a 5% commission. The agent then agrees to split that commission with a buyer's agent. The listing broker would get 2.5%, and the buyer's broker would get 2.5%.
If a buyer's agent has decided to provide a commission credit to their client (the buyer), that credit is limited to their commission percentage. They can credit part or all of it, but they can't exceed that 2.5% unless they want to pay out of pocket to make up the difference.
Agents can't 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 even foot the bill for moving costs.
Some lenders will limit how these credits are applied. You might not be able to accept the money at closing or as part of the closing transaction.
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 selling agent also brings in the buyer, the commission would be reduced from 5% to 4%. The agent earns 4% in total, without having to split the commission with another agent, for representing the seller and the buyer in dual agency. The seller benefits by paying a lower commission.
In that case, an agent might be less willing to part with some of their reduced commission by way of providing 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 the buyer. The hope is that these rebates will attract a volume of buyers to compensate for the loss of income.
Many of these discount brokers expect the buyers to do much of the legwork and interact solely through email. They often don't show buyers properties. They might not attend home inspections or explain paperwork when a buyer becomes confused. They typically don't even meet with the buyer until closing, if they attend the home closing at all.
Are Commission Credits Legal?
Commission credits, or rebates, are legal in 40 states, and the U.S. Department of Justice (DOJ) has even championed them. The DOJ has taken the position that providing these credits promotes healthy competition among agents.
Ten states don't agree, and they do not permit commission credits or rebates in any shape or form as of 2021: Alabama, Alaska, Iowa, Kansas, Louisiana, Mississippi, Missouri, Oklahoma, Oregon, and Tennessee.
What About Taxes?
The Internal Revenue Service (IRS) has also gotten on board with commission credits. 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 their 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. It increases to $500,000 for some married taxpayers who file joint returns.
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 $4,063 in financial assistance even if the agent only offered half of their commission.