Employee Relocation in Todays Market
Autumn is often the time you find folks relocating from one home to another with the help of real estate agents, Winnipeg movers, or hire van services. But often is the case that employers can get involved with the relocation process, especially if the employee is moving because of a promotion or reassignment. And so it is that many companies have questions about what to do with an employee’s home when he or she is moved to a new job location, especially with the real estate market is in a downturn throughout much of the country. Many employers could help the employee’s home get back on the market (click here to know how), while others tend to compensate.
Typically, the employer wants to protect the employee against financial loss on a “forced” sale of the home. With the employer thinking of ways to sort that, the homeowner can focus on finding a reliable realtor to help them find an ideal home in the new area that they’re moving to. People might not know the new area, so realtors can be highly beneficial. Perhaps people could contact these Halifax real estate agents, or other realtors in their relocation area, to support them in finding a new home. Knowing how much you can afford is the key piece of information you need before you can truly begin your property hunt – using the SoFi home affordability calculator should give you a strong indication as to what sort of real estate budget you’re working with.
With the employee finding a new house, the employer may be thinking about how they can stop their employee from losing money. Here are the most common ways to do that, and their consequences to the employee:
The employer reimburses the employee’s financial loss. Here the employer has the home appraised and agrees to pay the employee the difference between the appraised fair market value and any lesser amount the employee gets on the sale. Such reimbursement would cover the employee’s costs of the sale.
Note: The financial loss here is not the same as a tax loss. The financial loss is the home’s value less what the employee collects under “forced sale” conditions. In the current real estate market, the value is not always clearly determined. The relocating employee might think the home is worth more, based on earlier appraisals or comparative sales. A tax loss is the property’s tax basis (cost plus capital investments) less what’s collected on the sale.
If the employee has a gain on the sale (the amount collected on the sale exceeds the basis), gain can be tax-exempt up to $250,000 ($500,000 on certain husband-wife sales). However, tax loss on the sale of one’s residence is not deductible.
The employer’s reimbursement of the employee’s financial loss is taxable pay to the employee. Employers who want to shelter the employee from any tax burden on what is usually an employer-instigated relocation may “gross-up” the reimbursement to cover the tax. But gross-up can be costly. For example, a grossed-up income tax reimbursement for a $10,000 loss would be $15,385 for an employee in the 35% bracket – more where Social Security taxes or state taxes are also grossed-up.
Employer buys the home. Few employers directly buy and sell employees’ homes. But many do this indirectly, effectively becoming the homes’ owners, through use of relocation firms acting as the employers’ agents. An IRS ruling shows how to do this with no tax on the employee:
Option 1. The relocation firm as employer’s agent buys the home for its appraised fair market value, and later resells it. The firm collects a fee from the employer, which will cover sales costs and any financial loss to the firm on resale. The IRS now says that this fee is not taxable to the employee. Also, the employee’s gain on the sale to the relocation firm qualifies for the tax exemption under the limits described above ($250,000 or $500,000).
Option 2. The relocation firm offers to buy the home for its appraised value, but the employee can choose to pursue a higher price through a broker he or she chooses from a list provided by the relocation firm. If a higher offer is made, the relocation firm pays that price to the employee (whether or not the home is then sold to that bidder). Here again, the employee is not taxed on the firm’s fee and the gain is tax exempt under the above limits.
Tip: Either option works for the employee, letting him or her realize full value on the sale of the home (with possibly greater value through Option 2), without an element of taxable pay.
Caution: If the deal is structured so that the relocation firm facilitates a sale from the employee to a third-party buyer (rather than to the relocation firm), the employer’s payment of the relocation firm’s fee is taxable to the employee.
The Employer’s Side
Reimbursing the employee’s loss. This is fully deductible as a business expense, as would be any additional amount paid as a gross-up.
Note: It’s fully deductible, but it may be more costly, before and after taxes, than buying the home for resale through the relocation firm.
Note: Paying the relocation fee only, without buying the home, as in the “Caution” above, is also fully deductible, as would be any gross-up amount on that fee.
Buying the home. The change in the IRS rule was good news for employees, but it gave nothing to employers, whose tax treatment wasn’t covered. The official IRS position is that employer costs (other than carrying costs such as mortgage interest, maintenance, and fees to a relocation management company) are deductible only as capital losses, which, for corporate employers, are deductible only against capital gains. Taxpayer advocates tend to argue that employer costs here are fully deductible ordinary costs of doing business.
Questions?
Are you an employee who is being relocated this fall? Are you wondering about the sale of your home and the tax implications for you? We can answer your questions. Just give us a call.
970.668.0772, 970.668.0434, 888.668.0772
[email protected] – Colorado Tax Coach
To read Larry Stone’s previous post click here
