In a residential real estate transaction, who pays the brokerage fee? The Buyer or the Seller? This issue is frequently debated by buyers, sellers and real estate licensees alike.

In the purest sense, everything included in the purchase price, by definition, is paid by the Buyer. And that includes any listing, selling and buyer broker fees.

The Buyer is the only party contributing funds to the transaction (along with the Buyer's lender); the Seller makes no contribution of funds.

Actually, the only way a Seller can truly pay a brokerage fee is to do so outside of the purchase price (very rare). Otherwise, the Buyer pays for the full cost of the home, plus any marketing and brokerage fees, all of which are included in the contract purchase price.

This concept is obvious from a tax viewpoint as well. The Internal Revenue Service has ruled that the brokerage fees included in the purchase price of a home are included in the homeowner's basis of the property. Conversely, the Seller may not deduct brokerage fees as a selling expense, but rather must reduce the amount of the gross proceeds accordingly.

The Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage Corporation (FHLMC), and Government National Mortgage Association (GNMA) all agree that brokerage fees included in the purchase price are entirely financeable as an integral part of the cost of the home. The Department of Housing and Urban Development (HUD) Section 534 calls for a "buyers' agents fee to be included in the mortgage amount". Logically, these institutions would not lend a Buyer/borrower funds that are not part of a Buyer's investment in real property.

A simple analogy is sales tax, a concept most consumers understand only too well. Suppose you bought a jacket in an Ohio retail department store for $100.00. How much would you actually pay for the jacket? In Cuyahoga county the 7% sales tax would be added to the ticket price and the sales clerk would collect $107.00. If you charged this purchase to your credit card you would finance the full cost, purchase price plus sales tax. Your total cost in fact is $107.00, paid by your funds and/or your credit. Did the merchant pay the sales tax? No, you did. The merchant has included the sales tax in the total selling price and simply remits the 7% ($7.00) to the county auditor. The merchant's net profit is the excess proceeds of the gross selling price, less product costs, marketing costs, overhead and sales tax. Provided the selling price is adequate to cover all costs, taxes and overheads, the merchant can achieve his desired profit margin. The merchant cannot deduct the sales tax as a business expense for federal income tax purposes; he simply reduces his gross revenue by the amount of sales tax collected.

In a real estate transaction the brokerage fee can be compared to a sales tax as in the above example, where the Seller collects the fee in the total purchase price charged to the Buyer, then remits to the listing, selling and/or buying brokers. The key distinction is that the Seller does not pay, contribute, borrow or invest in any brokerage fee included in the purchase price, he simply remits the amount collected from the Buyer. It is the Seller's duty to determine whether the total purchase price is sufficient to cover all costs, fees, mortgages, liens, etc. and yield the desired profit.

This is not simply an exercise in semantics. Technically, legally and by regulation under federal lending and tax laws, the Buyer pays any brokerage fee included in the purchase price. The economic reality is that the Seller must also calculate his net proceeds, after ALL disbursements, to determine whether the selling price is adequate and acceptable.

Consumers should clearly understand the proper characterization and treatment of a brokerage fee as it pertains to residential real estate. This knowledge will help both parties in the transaction focus on the relevant economic issues, and not be distracted by misinformation and inaccurate labels.

Is the glass half empty or half full? The question raises a moot point. Because as long as the glass is sufficiently full enough to satisfy your thirst, it really doesn't matter how you interpret its relative volume.

Joseph A. Wolf, CPA, is an Accredited Buyer Representative and Certified Buyer's Agent with The Buyer's Agent of North East Ohio, Inc. in Cleveland, Ohio.