Do you employ people in your business? If you do, then you know the value that one, special employee can make to your business.
Sometimes, you have look far and wide to find those special people, though. You may find someone in a neighboring town, or hundreds of miles away. And, if you do find someone far away, there are often costs associated with relocating that person. But, the value you see in what that person could bring to your business makes it worthwhile, and you want to make the move as easy and financially attractive as possible. But, did you know that some employee relocation programs can backfire, and result in a taxable event for your employee?
The IRS recently looked at three scenarios where an employer helped an employee to relocate by purchasing and reselling that employee’s existing home. Two of the plans resulted in no tax consequences for the employee, but the third was problematic.
In all three cases, the employer used a a third party “relocator” service, to purchase the property from the employee and to pay all closing and maintenance costs associated with the property sale. The relocator could then turn around and resell the home at its leisure.
In the first case, the employee received a guaranteed price for his or her home. The IRS had no problem with this arrangement, and noted that it was no different from a typical sale, where the buyer pays all closing costs. The employee was entitled to the regular tax-free gain exclusion amount of $250,000 (or $500,000 for a couple filing jointly).
In the second case, the employee was not required to accept the relocator’s offer and was free to negotiate a higher offer with other third parties. If a third party offered a higher price, the relocator would match the price and buy the property at that higher price. As with the first scenario, the employee wasn’t responsible for paying any of the closing costs for the sale to the relocator.
Even though the employee had negotiated a higher price with a separate party, the IRS found this was essentially the same transaction as the first scenario. As long as the employee’s gain was within the tax-free gain exclusion amounts, everything was fine.
The problem came in the third scenario, where the employee could negotiate a higher price with a third party (instead of accepting the relocator’s offer), and the relocator was not obliged to match the offer. Control of the contract negotiations remained with the employee, who could close either with the third party directly or through the relocator (who would do a simultaneous close with the third party). Proceeds of the sale were distributed after the third party had received title. Closing costs and other associated costs were again paid by the relocator.
This time the IRS had a problem with the sale, saying that it was a single transaction, and not a clean sale to the relocator with a subsequent resale to a third party.
Because it was considered a single sale, all of the closing and maintenance costs that were paid by the relocator were all considered to be taxable compensation to the employee and paid in the course of his or her employment.
The moral? Be careful when you offer relocation plans to your new employees. If you sweeten the pot too much it could wind up leaving a sour taste in the mouth of your new star performer.