(Originally published in the July 2014 Housing Journal)
Are You Paying Too Much GRT on Real Estate Commissions?
The current economy has resulted in many contractors brushing off their (or their spouse’s) Real Estate Broker’s license, and keeping sales transactions truly “in-house.” A few NMHBA members have been audited by the NM Tax and Revenue Department regarding their handling of the Gross Receipts Tax (GRT) on those sales and real estate commissions. There was a surprise discovery that the amount of GRT due on the real estate commission earned on the sale of a new home was mostly over-paid to the state.
Most NMHBA members are aware the receipts from sales of vacant land are deductible, and no GRT is paid on the purchase/sale of vacant land under Section 7-9-53 of our tax law. However, GRT must be paid by the broker on the entire amount of the real estate commission primarily because the total receipts from the sale of the real property are deductible from GRT.
Land costs are allowed to be “backed out” of the total sales price when contractors report the sale of the completed construction project. Few are aware the real estate commission is also allowed a deduction because the land costs are “backed out.” An overpayment of GRT by the real estate broker might occur if this process isn’t understood.
Here are the pertinent sections of the New Mexico Administrative Code (NMAC) with the rules for application of the law. Members are encouraged to discuss the proper implementation of these rules with their accountants. The examples in NMAC assume the real estate commission is 6%.
“18.104.22.168 CALCULATING THE DEDUCTIBLE PORTION OF A REAL ESTATE COMMISSION
A. The portion of a real estate commission which is deductible is calculated using the following formula: Deductible commission equals total real estate commission times a fraction, the numerator of which is the taxable receipts from the sale of the property and the denominator of which is the total receipts from the sale of the property, or
Total commission x taxable receipts from sale = deductible commission
total receipts from sale
B. Taxable receipts from the sale means that portion of the receipts from the sale of real property which is attributable to improvements constructed on the real property by the seller in the ordinary course of the seller’s construction business.
C. Example: A real estate broker receives a $6,000 commission on a $100,000 sale of property by a construction contractor. Of the $100,000, $70,000 is the value of improvements constructed by the seller, for which the seller is subject to gross receipts tax. $30,000 is the value of the underlying land, which the seller (contractor) can deduct from gross receipts pursuant to Section 7-9-53 NMSA 1978. The real estate broker must report $6,000 as gross receipts. The real estate broker may calculate the deductible portion using the formula given in Subsection A of Section 22.214.171.124 NMAC:
$6,000 x $70,000 = $4,200
Thus, the real estate broker deducts $4,200 and pays tax on the remaining $1,800.”
“126.96.36.199 REAL ESTATE COMMISSION ON SALES NOT SUBJECT TO GROSS RECEIPTS TAX ARE FULLY TAXABLE
A. No portion of a real estate commission is deductible if the total receipts from the sale of the real property are either deductible or exempt from gross receipts tax.
B. Example 1: A real estate broker receives a $6,000 commission on the sale of a home by the owner. The receipts of the homeowner from the sale are exempt as receipts from an isolated or occasional sale pursuant to Section 7-9-28 NMSA 1978. The real estate broker must pay tax on the entire $6,000 commission.
C. Example 2: A real estate broker receives a $6,000 commission on the sale of a piece of raw land by a developer. Receipts from the sale of the land are deductible from gross receipts as receipts from the sale of real property pursuant to Section 7-9-53 NMSA 1978. The real estate broker must pay tax on the entire $6,000 commission.”
DISCLAIMER: This article provides general coverage of its subject area. It is provided free, with the understanding that the author, publisher and/or publication do not intend this article to be viewed as rendering legal advice or service. If legal advice is sought or required, the services of a competent professional should be sought. The author and the publisher shall not be responsible for any damages resulting from any error, inaccuracy or omission contained in this publication.