Coalition Corner:
Business training tools for HR staff, real estate agents and other
service professionals in the relocation and real estate industries
Relocation Home Sale Assistance
Programs and Tax Implications – Part 2 of 2
by Peter K. Scott, Worldwide ERC®/Coalition Tax Counsel
Washington, DC
© 2005, Employee Relocation Council/Worldwide ERC® Coalition
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Program objectives
• This program supplements an editorial feature in
Worldwide ERC®’s Mobility magazine
• This segment is Part 2 of a two-part series that will:
– Examine some of the basic tax implications of
several prominent types of relocation home sale
assistance programs (as defined in Part 1)
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Introduction
•
Employers use different methods and programs – with different tax
implications -- to help relocating employees sell homes
•
Some of the more common programs examined here include:
–
–
–
–
Direct Reimbursement
Appraised Value Sale
Amended Value Sale
Buyer Value Option and
•
Since a Tax Court’s 1997 Amdahl decision, IRS has been aggressively
auditing relocation home purchase programs
•
The issue is pending resolution in the IRS National Office, with a ruling
expected later this year
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In Direct Reimbursement Programs…
•
All costs reimbursed to the employee are taxable, and
subject to withholding and payroll taxes
•
If an employer grosses up the costs to assist with taxes, the
cost of that assistance can be substantial
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In Appraised Value Sale Programs…
•
The IRS has agreed (Revenue Ruling 72-339) that as long as employers
or relocation management companies pay fair market value, costs avoided
by employees (such as real estate brokers’ commissions), are not income
•
In exchange for accepting the costs and risks of property ownership,
employers can avoid the substantial gross-up costs incurred in a DR
program
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In Amended Value Sale Programs…
•
The IRS has never formally extended the same position to AV (or BVO)
transactions, but a long-standing informal practice is to treat properly structured
AV programs the same as appraised value transactions
•
The rationale for favorable tax treatment: two bona fide sales have taken
place:
1.
2.
The employee sold the residence, and no real estate commission was ever incurred
or paid (provided the initial transaction contained an exclusion clause)
When the employee resells, and the sales commission and other closing costs are
paid, the commission and costs are regarded as the employer’s own expenses, and
not attributable to the employee*
*An exception occurs if closing costs that are treated under local law as borne by the
seller-employee are actually incurred on the transfer to the employer, and are paid by
the employer, in which case such costs would be income to the employee.
Examples include title insurance and transfer taxes.
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In Buyer Value Option Programs…
•
The IRS has never expressed any opinion, formal or informal, as to the tax
treatment of BVO programs
•
BVO programs should be regarded as carrying a higher tax risk than AV programs
•
While many of the same arguments supporting the AV program also support the
BVO, the case is not as strong with a BVO
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Conclusions
•
The most important consideration is to structure any home sale
assistance program so that two, separate, independent sales occur:
one from employee to employer or RMC and a second from employer
or RMC to outside buyer
•
It’s critical that the employer or RMC assume real risks and burdens of
property ownership
•
Worldwide ERC® has published a list of eleven “key elements” which, if followed, will
create the best case for a two-sale characterization in an AV program (and are
equally applicable to a BVO). ERC members can find the list at
http://www.erc.org/coalition/tax_legal/subscriber/200011_tax_11keyelements.shtml
•
An earlier edition of “Coalition Corner” (February 2003) also contains
additional details on home sale programs and the 11 key elements and can
be found at http://www.erc.org/coalition/training_modules/CC_re_law.ppt
Conclusions, continued
•
As noted earlier, since a Tax Court’s 1997 Amdahl decision, the IRS has been
aggressively auditing relocation home purchase programs
•
Among other things, agents have questioned whether programs meet IRS
requirements if the employer or RMC did not take and record a deed to the home
•
Since 2001, Worldwide ERC has recommended that companies take title by deed
•
The issue is pending resolution in the IRS National Office, with a ruling expected later
this year
•
Companies should be scrupulous in following the eleven key elements and proper
procedures in any home sale assistance program
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