What are IRS Reporting Requirements for Cooperative Commissions?

By
Real Estate Broker/Owner with Providence Group Realty TREC# 0608931
http://actvra.in/486L

Brokers who don't currently practice collecting a W-9 from Cooperating Brokers for ALL real estate transactions might be in for a shock... The National Association of Realtors has advised its members that listing brokers are required to report real estate commission payments for cooperating brokers on Form 1099-MISC.  Details of this reporting requirement can be found on the NAR website, www.realtor.org, under the Law and Policy section*.   

To be in compliance, listing brokers must obtain a completed and signed W-9 form for each cooperating broker participating in any and all real estate transactions. 
 

While this is common practice for lease transactions, many brokers are under the false impression that collecting a W-9 and issuing a 1099-MISC is not required for transactions that are settled through a title company. The mistaken rationale is that listing brokers  don't receive the funds disbursed at title to cooperating brokers, and therefore, don't wash the funds through the brokerage account.  This rationale may also be reinforced or provided by tax, accounting, and legal professionals who aren't aware or are unfamiliar with the IRS rules for real estate brokerage reporting requirements. 
 

The reality is, "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." 
 

Still doubting the accuracy of this directive? The NAR Article* provides the following 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

Still wondering if perhaps this is dated information that doesn't apply to current standards of practice?  TAR's Legal Hotline confirmed it for us on 12.12.2013.

(If you do not see a media player in your browser, download the audio file here.)

 Implications:

For Brokers: 

  • Listing broker collects w-9 and issues 1099 to cooperating broker
  • Listing broker collects w-9 and issues 1099 to listing agent
  • Cooperating broker collects w-9 and issues 1099 to selling agent
  • A managing broker may need to implement or increase reconciliation and auditing practices to protect from having income over-reported on 1099s received
  • Some brokers may elect to alter CDA procedures for increased accountability and transparency. The convenience of table funding may become obsolete if accounting practices require standard funding treatment. Having a money trail that matches 1099s  seems far more appealing from a bookkeeping and defensibility perspective.
  • Listing Broker CDAs could now reflect a disbursement amount for the cooperating broker in addition to the listing broker and/or listing agent(s).

For Realtor Associations

Although this IRS rule is not a new, it may not be widely practiced in certain geographies. For the benefit of all brokers and brokerage entities, an awareness of the rule and education around practice requirements is obligatory to minimize confusion and potential resistance to requests for compliance cooperation.

For Title Companies

It isn't a problem you created, and it isn't your fault; however, our Title partners are often the last opportunity in a transaction for file accountability. Be prepared to receive requests for assistance in collecting W-9s from cooperating brokers at closing, and to consider implementing a policy for your practices in terms of CDA disbursements.  A listing broker faces financial penalties for failing to collect a W-9 and/or failing to issue a 1099 for a cooperating broker. There is an element of conflict for the regulations Title  must comply with in regards to HUD reporting and deadlines for disbursing funds.  As awareness gains traction, the new default might be to disburse 100% of the commissions to the listing broker for subsequent disbursement. This is certainly a question to be raised within your own offices regarding liability and standard accounting practices.

Financial and Tax Professional  / Advisors

The IRS rule appears to conflict with the advice and direction that many CPAs and tax professionals have given to their real estate broker clients regarding how to treat 'income' that is never received (read ' never washed') through a brokerage account. You may feel caught off your guard every bit as much as your broker client does.  While recognizing the error is helpful, also recognizing that brokers who attempt to remedy their accounting and reporting procedures  will need your support. For many brokers, this will be a huge change in business practice, and may require backtracking to correct prior filings.  For busy brokerages who are not currently subscribing to this standard of practice, the burden of reconciling, auditing, and producing 1099s just became a new full-time job.

*Source: http://www.realtor.org/letterlw.nsf/pages/1208_1099 (Note: You must be a NAR member and log in to view this article online.  To view an alternate .pdf printout of this page, click here.)
 

**Exceptions:  Consult your tax professional for exceptions regarding requirements relating to compensation amounts and employment status.  Brokers are are not required to issue a 1099-MISC to a corporation,  but are required to obtain a W-9 from all of the companies that they do business with even though the Cooperating Broker's company may be incorporated.

 

Disclaimer: This information was shared for general information purposes only. It is not intended to serve as legal or financial advice.  If you have questions about how this information might affect you, please seek the counsel of a qualified professional, such as your attorney, tax professional or CPA. 

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Tags:
real estate brokerage
accounting
taxes
responsibility
listing broker
commission
w9
1099
reporting requirements
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Rainmaker
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Sharon Parisi
Keller Williams Dallas Premier Realty - Dallas, TX
Dallas Homes

Amanda, this is important information.  Sometimes it takes a few requests to get the information from the Buyer's agent!

Jan 17, 2014 06:03 AM #1
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Rainmaker
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Amanda Thomas

Broker, Realtor®, SRES®, BPOR
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