A recent video from Google's head of search spam , Matt Cutts named If a site linking to mine gets caught selling links, what happens to my site? That video basically explains what happens if a site that sells links and Google knows it, what happens to a site that has links from the link selling site?
In short, not much.
Matt Cutts made three points in this video:
(1) The link seller's web site should notice a toolbar PageRank downgrade 30 - 50%.
(2) The link seller's web site loses the ability to send PageRank going forward.
(3) The links pointing to your web site from the link seller's web site are no longer counted and no longer benefit your web site.
But what about link buying penalties? Well, clearly Matt didn't discuss it in his 90 second video. It obviously, despite my title, doesn't mean that Google won't ditch out a penalty to someone who clearly buys links. But "typically" this is how Google handles it, they simply stop those paid links from benefiting you, which can often feel like a penalty.
Here is the video:
Yes, I know, the links on this site do not pass benefit.
Forum discussion at WebmasterWorld.