Don’t Forget Your 1099!

Have you paid (or earned) a cooperative commission in the last year? Then you’ll need to complete Form 1099-MISC in the coming weeks. Commissions over $600 paid to non employees warrant the need to for the 1099. Not sure who needs to file? Here is more information via NAR:

IRS Requires Reporting of Cooperative Commissions

The Internal Revenue Service (“IRS”) requires that listing brokers who pay a cooperative commission in excess of $600 to an individual who is not their employee must complete a Form 1099-MISC. While this is not a new law, it has come to NAR’s attention that not all real estate professionals are aware of this requirement. Below is a brief description of this issue and links to the necessary forms.

IRS ?Requirements

The IRS requires individuals that:

1) pay compensation of $600 or more to
2) an individual who is not an employee
3) for services provided
4) during the course of the payor’s trade or business

to complete Box 7- Nonemployee Compensation on Form 1099-MISC, give Copy B of the form to the individual who received the compensation, and file Copy A with the IRS. “Nonemployee compensation” includes fees, commissions, prizes, and awards, and so would include cooperative commissions and referral fees paid by real estate professionals because these payments are made during the course of their trade or business to nonemployees.

These filing requirements exist even if the listing broker is not directly paying the cooperative commission to the other broker. So, if the cooperative commission is paid by the escrow agent to the other broker, the listing broker may still need to file a 1099-MISC. This is because the funds constituting the cooperative commission are drawn from the listing broker’s portion of the commission and so the payment is technically made by the listing broker.

This requirement only applies to payments made to individuals, and does not apply when the payments are made to corporations. Listing brokers should still make it part of their business practice to obtain a completed Form W-9 from anyone to whom it pays a commission, whether it be an individual or a corporation. Property owners do not need to complete a 1099-MISC for the commissions they pay to real estate professionals because this activity is not part of their trade or business.

Here is an illustrative example:

Joe Seller lists his home for sale with real estate broker Don Listbroker. Listbroker places the listing into a multiple listing service and offers a cooperative commission to any MLS participant who brings him a buyer that successfully purchases the property. A client of another broker’s salesperson, Julie Buyerep, made an offer to purchase Seller’s home. Seller accepts the offer, and the transaction closes. At closing, the escrow agent makes commission payments to both Listbroker and Buyerep’s principal broker, Don Broker. Here is who is required to report commissions to the IRS:

Listbroker has an obligation to report the commission payments made to Broker, even though Broker received the commission check from the escrow agent

Broker has an obligation to report the commission amounts that he pays to Buyerep

Neither Seller nor the buyer have any obligation to report the commissions that their real estate representatives received

Reporting Deadlines and Other Information

For example, for the 2009 tax year, all 1099-MISC Copy B forms must be sent to payment recipients by February 1, 2010. The IRS must receive Copy A by March 1, 2010. If the taxpayer files electronically, they have until March 31, 2010 to file Copy A (note there are certain software requirements for filing electronically with the IRS). Below are links to the IRS’s instructions for completing Form 1099-MISC and also the Form itself.

http://www.irs.gov/pub/irs-pdf/i1099msc.pdf

http://www.irs.gov/pub/irs-pdf/f1099msc.pdf

In order to complete the 1099-MISC, a taxpayer needs to obtain certain information from the recipient, such as a social security number or an employer identification number. Brokers should obtain this information by giving Form W-9 to every broker to whom it pays cooperative commissions (or causes to be paid) and request that the cooperating brokers return a completed Form W-9 to the taxpayer. This form will give the taxpayer sufficient information to complete the 1099-MISC and will also inform the taxpayer about whether the cooperating broker is an individual or a corporation.

Remember, if the cooperative commission is paid to a corporation, the taxpayer does not need to file a Form 1099-MISC. However, it is recommended that the taxpayer make it part of its risk management policies to obtain the W-9 from all cooperating brokers, in order to demonstrate that it verified the corporate status of the cooperative broker. If the cooperating broker refuses to return the W-9, the taxpayer can still verify the corporate status of the cooperating broker by checking its secretary of state’s website.

Below is a link to Form W-9 and the accompanying instructions.

http://www.irs.gov/pub/irs-pdf/fw9.pdf

TO COMPLY WITH CERTAIN U.S. TREASURY REGULATIONS, WE INFORM YOU THAT, UNLESS EXPRESSLY STATED OTHERWISE, ANY U.S. FEDERAL TAX ADVICE CONTAINED IN THE TEXT OF THIS COMMUNICATION, IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, BY ANY PERSON FOR THE PURPOSE OF AVOIDING ANY PENALTIES THAT MAY BE IMPOSED UNDER THE INTERNAL REVENUE CODE.

Referral Fees May Be Paid To Out Of State Brokers Provided They Are Licensed In Their Home State

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There Is No Maximum Or Standard Commission Rate

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A Title Company May Pay Commission Directly To An Agent With Proper Assignment From The Brokerage

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An Incentive Program Established To Increase Referrals Is Likely A Violation Of The Statute Forbidding Payment Or Compensation To A Non-Licensed Person

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A Real Estate Licensee May Receive A Commission For The Sale Of A Mobile Home Under Certain Conditions

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Property Management Firm May Not Split Its Commission With A Non-Licensed Person

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Advice from an Appraiser

The sultry combination of low inventory and low interest rates are causing bidding wars for homes at all prices in Arizona. While this could be an exciting time for REALTORS®, that excitement can be quickly subdued when an appraisal comes back significantly below the bid price. And who looks like the bad guy? The appraiser.

John Dingeman is an Arizona appraiser with Priority Appraisal, LLC who takes his job very seriously and states, “most all mortgage financial transactions are federally regulated, which means the appraisal associated with the loan is under extreme scrutiny; more so now than ever since the 2004-2006 real estate frenzy.” He also wants to remind agents that at the end of the day “an appraiser’s role is to act as a disinterested third-party in the transaction.” Based on his years of experience, Dingeman offers some guidelines for agents to consider when choosing comparable sales.

Understand What a “True” Comparable Is

The problem with choosing a price based solely on price-per-square-foot is that “it doesn’t take into account other amenities or improvements like pools, garages or other upgrades that might have been done to the home,” says Dingeman.  “You have to compare apples to apples, not apples to grapefruits; which occurs when all of the sales are lumped together.”

“Another issue where agents seem to struggle is what is actually included in the gross living area or what constitutes a bedroom,” said Dingeman. He gives the example of an attached casita with a separate entrance off of the home, “that’s not considered a bedroom or extra square footage.” Getting a better picture of what the listing is really like with regards to other similar homes will help tremendously when counseling your buyers and sellers on price, not to mention a more accurate appraisal.

Get to Know the Neighborhood

“A single sale does not make the market,” said Dingeman. “Do some research to find out if there are a lot of flips taking place in this area.” Consult with other agents for their insight; ones who may be more familiar with the area than you. “I will regularly drive through the neighborhoods, especially if I see an anomaly in the marketplace,” said Dingeman.

Pay it Forward

Dingeman also gives this suggestion to agents, “update your listing post-sale.” Appraisers do not physically inspect the interior of the comparables, so appraisers rely, in part, on the photos and remarks provided by the agents in their MLS. “Making comments in a listing post-sale can really put a property in the right perspective, not only for appraisers but other agents as well.”

“We’re in a similar market now as we were in 2005,” comments Dingeman. “This time, the lenders are taking a different approach and placing more restrictions on lending. If the house appraises for $100,000, lenders are no longer lending at 100 to 120 percent of the appraised value. But offering only equal to, or something less than.” Take time to counsel your buyers and sellers on the market, and you’ll find yourself in a better position to land the sale and make a homebuyer’s dream come true.

A Real Estate Agent May Not Record A Lien For The Collection Of A Residential Commission

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Real Estate Broker May Not Pay A Commission To A Mortgage Broker

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