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My husband is a realtor and agreed to contribute a portion of his commission on a land purchase/construction loan to the down payment required on said purchase/loan in exchange for 50% of the profits once a spec home was built and sold on the land purchased. Can he go ahead and deduct this contribution against the commission he received, or does he have to wait until the house sells and deduct it against the proceeds?

Submitted: 46 days and 2 hours ago.

Category: Tax

Value: $45

Status: CLOSED

State/Country relating to question: Texas

Posted by Mark D 46 days and 2 hours ago.

Answer

XXXXXXX,

The commission he contributed would be used to calculate his basis in the investment. When the property is sold, proceeds he receives in excess of that amount will be treated as capital gains. No current year deduction is allowed. Also, please note the contributed (forfeited) commission must still be recognized as income in the year earned. Please let me know if you have any further questions.

Regards,

XXXX X

46 days and 2 hours ago.

Reply

How are we expected to pay taxes on income that was essentially forfeited...we just don't have the money! We are out of pocket NOW, so why do we have to wait until LATER to be able to deduct this expense?!

Posted by Mark D 46 days and 2 hours ago.

Answer

XXXXXXX,

Per the IRS, the money was not forfeited. In lieu of cash, your husband received an interest in an investment. This transacts compensation paid, and would be taxable. Since it would generally be hard to figure out what the investment was worth itself, the amount recognized should be the fair market value of services rendered by your husband (the amount forfeited in lieu).

An investment is not considered an expense. So instead of a deduction, it creates a basis to used to offset future capital gains.

I can appreciate your frustration, but I am giving you an answer based off of IRS rules and regulations. Please let me know if you have any further questions.

Regards,

XXXX X

46 days and 2 hours ago.

Reply

We may have received an 'interest in an investment', but this 'interest' cannot be used to pay our current tax liability...i'm just curious, how does the IRS propose we pay these taxes...with our good looks?
Do you have any advice for me?

Posted by Mark D 46 days and 2 hours ago.

Answer

XXXXXXX,

Exchanges for services can have serious tax consequences (like you are experiencing now) if the taxpayers are not properly advised of tax implications of such bartering. The receipt of the investment itself constitutes income, and there is no way to change that. If you cannot afford to pay the taxes on this income, you may want to look into selling some, or all, of the investment interest to generate funds.

It is not uncommon for taxpayers to experience taxable income without actually receiving the income. For instance, an LLC member may have to recognize $25K in income, even if they have not received a distribution of profits. I would suggest you have a local tax professional look at your details now so you can be proactive for this year's taxes. Please let me know if you have any further questions.

Regards,

XXXX X

46 days and 1 hours ago.

Reply

One more question...
This transaction happened in 2006. The spec home still has not sold. There is no profit left in this investment and it will probably generate a loss. If the loss is generated in 2009, can we go back and apply it against that commission we received in 2006 which bought us the interest in the investment to begin with?

Accepted Answer

XXXXXXX,

If a loss in generated from the sale, it would be considered a capital loss. Capital losses may be used only in the current year, or carried forward if unallowed in the current year. They cannot be carried back. Please let me know if you have any further questions.

Regards,

XXXX X

Accepts:
Expert:	Mark D
Pos. Feedback:	99.6 %
Answered:	10/8/2009

Tax Preparer

MBA, CTEC Registered, CPA Firm Experience with Business and Individual Tax Returns and Issues

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State/Country relating to question: Texas

Answer

Reply

How are we expected to pay taxes on income that was essentially forfeited...we just don't have the money! We are out of pocket NOW, so why do we have to wait until LATER to be able to deduct this expense?!

Answer

Reply

We may have received an 'interest in an investment', but this 'interest' cannot be used to pay our current tax liability...i'm just curious, how does the IRS propose we pay these taxes...with our good looks?
Do you have any advice for me?

Answer

Reply

Accepted Answer

XXXXXXX,

If a loss in generated from the sale, it would be considered a capital loss. Capital losses may be used only in the current year, or carried forward if unallowed in the current year. They cannot be carried back. Please let me know if you have any further questions.

Regards,

XXXX X

Tax

Have your own Tax question?

Related Tax Topics:

Question

Optional Information

State/Country relating to question: Texas

Answer

Reply

How are we expected to pay taxes on income that was essentially forfeited...we just don't have the money! We are out of pocket NOW, so why do we have to wait until LATER to be able to deduct this expense?!

Answer

Reply

We may have received an 'interest in an investment', but this 'interest' cannot be used to pay our current tax liability...i'm just curious, how does the IRS propose we pay these taxes...with our good looks?Do you have any advice for me?

Answer

Reply

Accepted Answer

XXXXXXX,If a loss in generated from the sale, it would be considered a capital loss. Capital losses may be used only in the current year, or carried forward if unallowed in the current year. They cannot be carried back. Please let me know if you have any further questions.Regards,XXXX X

Related Tax Questions

We may have received an 'interest in an investment', but this 'interest' cannot be used to pay our current tax liability...i'm just curious, how does the IRS propose we pay these taxes...with our good looks?
Do you have any advice for me?

XXXXXXX,

If a loss in generated from the sale, it would be considered a capital loss. Capital losses may be used only in the current year, or carried forward if unallowed in the current year. They cannot be carried back. Please let me know if you have any further questions.

Regards,

XXXX X