By Benny L. Kass
Saturday, June 9, 2007

Real estate commission rebates are back in the news.

Last week, Tennessee Gov. Phil Bredesen (D) signed into law a bill that prohibits real estate agents and brokers from giving cash rebates to home purchasers. One of the arguments used by the legislators supporting the ban was that rebates encourage tax fraud, in that consumers would not report that money as income when they file their tax returns.

However, the Internal Revenue Service has taken the opposite position. In a private letter ruling Feb. 9, the IRS said that such cash rebates are not income but rather represent an adjustment to the purchase price of the home.

Such rulings may not be cited as precedent, but they do reflect the thinking of the IRS. Accordingly, it is safe to say that a real estate commission rebate does not have to be reported as income.

According to a recent report by the Federal Trade Commission and the Department of Justice on competition in the real estate brokerage industry, rebates "can be powerful tools for price competition between brokers." Further, "by returning money to home buyers, rebates can also benefit home sellers, because buyers will have more to spend on the home as opposed to commission payments."

In Tennessee, however, supporters of the ban argued that prohibiting rebates protects consumers from backroom deals between agents and outside parties, such as referral services and mortgage lenders.

The Tennessee situation is interesting. On May 3, the state real estate commission, presumably under pressure from the U.S. Justice Department, eliminated its earlier ban on rebates. Less than a month later, however, the governor signed the bill reinstating that ban.

Only a handful of states do not allow rebates to be given to the home-buying consumer. There are no such prohibitions in Maryland, Virginia or the District.

As noted by the federal report, there is a trend in real estate toward "nontraditional" brokerage services. Indeed, in the Washington area, a number of "rebate companies" have come on the scene. They vary in approach, offering different forms and amounts of cash rebates.

If you are a potential home buyer, it obviously is enticing when a real estate agent offers you a percentage of his commission when you buy a house.

But don't stop there. Shop around and talk with a number of brokers. What experience do they have? Are they familiar with the neighborhoods you are interested in? Consider whether you need an agent at all. If you have access to a computer, homes -- including condominiums and cooperative apartments -- can be found on numerous local Web sites, including interactive photos of the house and the surrounding areas.

You can also do price shopping online. Many jurisdictions list recent home sales on their Web sites. Zillow.com gives what it calls "zestimates" of market prices on homes throughout the country.

Real estate has moved into the 21st century. While "caveat emptor" -- let the buyer beware -- may still be the rule of law in some states, the home-buying consumer now has the tools to make educated decisions, from whether to use a real estate broker to options on the various kinds of mortgage loans.

Encouraging competition cannot be accomplished only through legislation. A smart, enlightened consumer is an important component in this equation.

Benny L. Kass is a Washington lawyer. For a free copy of the booklet "A Guide to Settlement on Your New Home," send a self-addressed, stamped envelope to Benny L. Kass, 1050 17th St. NW, Suite 1100, Washington, D.C. 20036. Readers may also send questions to him at that address or contact him through his Web site, http://www.kmklawyers.com.