Employee Relocation

Unquestionably, reimbursement of brokers’ commissions and closing costs, in conjunction with the sale of a relocated employee’s home, creates taxable income. During the mid-1960s corporations created the first home purchase programs in an attempt to eliminate the creation of taxable income resulting from the reimbursement of these costs to the employee thus eliminating the creation of income as well as the cost to gross up that income to keep the employee whole.

In the typical home purchase program the employer, or a supplier retained by the employers (throughout this white paper, utilization of the word employer also refers to a relocation supplier retained by the employer), offers to purchase the employee’s home at “fair market value” as set by an appraisal process. The employer then allows the employee to test the market for a set period usually 30-60 days to see whether they can sell the home for more than the appraised buyout offer. If the employee elects to accept the buyout, then the employer (or relocation supplier) buys the home and closes with the transferee. Closing costs are not charged to the employee, as the employer is simply willing to take a deed for the home without any obligation incurred for such costs. The only exception to this is the first transfer tax (where it is assessed), which is the sole responsibility of the transferee. Further, if the employee lists the home for sale, he or she must have had the real estate broker sign an “exclusion clause,” so that the employee does not incur any obligation for real estate commission if the employee sells the home to the employer. Accordingly, no commission upon the sale from the employee to the employer is due.

If during the offer period the employee does find a buyer willing to pay more than the employer’s offer, the recommended procedure to maximize the tax benefits of using a compliant home sale program would be to use the Amended Value Sale process described below:

Amended Value Sale: In an amended value sale, the employee informs the employer that a buyer is willing to pay more for the home and the employer (or relocation provider) then amends its fair-market-value offer up to the amount offered by that buyer.

If no buyer is procured by the employee, he or she will accept the offer from the employer. The employer then completes the sale with the employee and conducts a closing where prorations are made up to a certain date (generally the date at which the employee vacates the home). Thereafter, the employer attempts to resell the home and upon such resale all the costs of brokers’ commissions, closing costs and any losses on the resale of the home are incurred by that employer. read more.

To read the rest of the conversation, visit our resource library.