Many states in the US like Texas and Georgia allow real estate cash back legally. Many people have asked me if this cash back is taxable and should it be shown on their annual US 1040 tax returns?
The good news is that the agent cash back after closing in US is not taxable in your hands. You can safely keep the full amount and use is to buy furniture for your new home.
New Construction Home 5% Cash Back
New construction property 5% cash back is popular with H1B workers and is normally offered by agents in high competition market such as Dallas. The incentive is given specifically in new homes as the agent does not have much to do in the deal between buyer and developer.
Buyer would normally just look at newly constructed home, take a buying decision and would involve the real estate agent at the time of signing the sale contract. The agent would receive 3-5% sales commission from builder and then would pass on the whole amount to buyer by just keeping about USD $1000 as his own cost.
Real estate agents in Atlanta also do the same because they can get good revenue even if they just keep 1k for every sale and that too without doing anything in the whole sale transaction.
Real Estate Agent Issued Form 1099-MISC
Turbo tax suggests that you should ask for a corrected 1099-MISC from your real estate agent to avoid paying tax on your 1040 return. In home purchase money back program, there is no 1099-MISC required.
Real estate agent cash back is not taxable in the US.
Buyer’s real estate agent is not required to issue 1099-MISC for cash back payments.
You should ask your agent to withdraw form 1099-MISC if they have issued it.
Note that Indian bank NRO, NRE interest is taxable in US even though Indian bank does not issue form 1099-INT.
IRS Rule for Property Purchase Cash Back
IRS had clarified that any cash back received from developer or real estate agent is not taxable as it is a rebate that you received on purchasing price.
You purchased a home directly from builder like Landon homes in Dallas for $500k. There is a broker who sent you a cash back check of $24k, which is roughly 5% commission after keeping 1k as his own commission.
This cash back is considered a rebate (or credits) in home price by IRS and hence is not taxable on your 1040 return.
As per IRS, down payment assistance received by a home purchaser represents a rebate or an adjustment to the purchase price, and, as such, is not included in a purchaser’s gross income.
Here is IRS ruling:
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Similarly, if you buy or lease a car with manufacturer cash back rebate, you do not include it in your gross income. The rebate is considered an adjustment to the purchase price of the automobile.
Should Agent Issue 1099-MISC?
As given in IRS ruling, your real estate agent is not required to make a return under section 6041 of the Code for payments as these payments are are not considered your (home buyer’s) income.
Your real estate agent should not be filing any IRS reporting forms for cash back.
The broker should reduce the cash back amount from his own gross income while filing its own income tax return.
How to file 1040 Return if Agent is not withdrawing 1099-MISC?
If your agent is not ready to withdraw the 1099 MISC for cash back, then you can show it on your tax return and claim that it is not taxable.
You would need to prepare a paper based return. You cannot e-file if you have this 1099 MISC from broker that needs to be negated.
Do not add the 1099-MISC income on your 1040 return.
Attach a cover letter explaining why this cash back (1099-MISC) is not reported by including a copy of the above IRS ruling.