January 23, 2010

MIFairTax Taxation of Real Estate Commissions~Roger Buchholtz

MIFairTax Taxation of Real Estate Commissions

Roger Buchholtz

All goods and services will be taxed when sold to the end user, however, sales commissions are taxed today, the real estate salesman pays an income tax on the sales commissions. Like today, sales commissions will be included in the total purchase price to the consumer.  The difference is that under the FairTax/MI FairTax the tax is more transparent to the buyer.  Is it better for the realtor to have to pay an income tax or the customer to have to pay a sales tax?  It makes no difference to the consumer because they ultimately pay the tax.  Because the realtor will have no income tax to pay he/she can have the same net income at a lower commission.  If this is done the realtor is kept whole, and the customer is also kept whole because the lower commission would offset the sales tax on the commission.  The net impact of the commission on the purchase price of the home would remain essentially the same.

Actually, the realtor will fare quite well under the FairTax/MI FairTax because the only sales that will be taxed are sales of new homes, whereas, ~80% of sales are of used homes, which will not be taxed.  Looked at from that perspective, only ~20% of home sales will be taxed.  In addition, commercial sales will not be taxed.  Sales to businesses are not taxed as such taxation would be passed on in the price of the good or service being produced.  In essence, under the current tax system realtors must pay income tax on all commissions (new and used residential property and business property) whereas, under the FairTax/MI FairTax the realtor pays no tax, however, the buyer pays a sales tax but only on non business property and new residential property (around 10% - 15% of total real estate sales).

The same points are generally true for other providers of services (doctors, lawyers, accountants, pool keepers, maids, etc.).

Roger Buchholtz


No comments:

Post a Comment

Please be patient on comment approval. Too many places to be. Thanks for your thoughts.