Real estate agents help clients navigate the complexities of buying and selling homes. These licensed professionals generally show homes, help clients fill out contracts, facilitate negotiations and coordinate close of escrow. Although your agent can act on your behalf in matters relating to a real estate transaction, you pay his fee indirectly, which means you are not responsible for sending him a 1099 at the end of the year.
You may be familiar with some, but not all, of the steps required to successfully close a real estate transaction. As such, you might contract the services of an agent to usher you through the legal process. When you sign a buyer- or seller-agency agreement to "hire" a real estate agent, however, you are actually contracting the services of his broker, even if you never meet the broker personally. Even though your real estate agent may dedicate many hours to your case and develop a close relationship with you as a result, all payments, up front or delayed, are made to the agent's broker.
Broker's Chain of Command
Real estate brokers have the training and hold the license that gives them the legal authority to facilitate real estate transactions on behalf of consumers. They also have the authority to use the services of licensed, independent contractors, commonly called real estate agents, to solicit clients and conduct business under their direct supervision. Real estate brokerage firms run large and small; some are run by individuals, others by large corporations. When close of escrow occurs, agents are paid commission by their brokers, which amounts to a percentage of a transaction's proceeds that you agreed to pay in the agency agreement. Brokers distribute 1099s to their salespeople annually.
Proceeds and Taxes
A real estate broker's commission may amount to thousands of dollars, and most consumers do not pay the broker until closing. Industry standards dictate that the closing agent, generally a title company or a real estate attorney, should distribute the commission among the brokers involved. Your closing costs, which include the broker's commission, are detailed on the settlement statement, or HUD-1, provided to you at closing. The settlement statement can be used, along with other financial paperwork, to determine deductions when preparing your annual tax return.
Because the law is clear regarding how and to whom real estate commission and fees should be paid, you should avoid working with any real estate agent who asks you to pay him directly. Additionally, all practicing real estate agents must have an up-to-date license on file in the state in which they practice. If you are unsure about an agent's credentials, navigate to your state's online, licensed-professions database to look up his name. You can also check the agent's credentials at his broker's physical office, as the broker is required to post copies of her agents' licenses in a prominent place, usually the office lobby.
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