Common Problems with Home Sale Programs
IRS audits of Home Sale programs may not be as pervasive as they were prior to 2005 but they still exist. Ensuring that your program can endure such an audit will save you unwanted disruption and program expense as a consequence of non-compliance. No single defect will likely result in a failed program, but when there is one bad practice there is usually more. Failure of your program will be more likely when multiple defects are combined.
Don’t let the current lull of IRS activity lull you into a false sense of security! There is no time like the present for a self-audit of your Home Sale programs.
- Allowing Employees to sign the contract with the outside buyer. Such practice creates a taxable “Assigned Sale” program. Avoid connecting the employee to dealings involving the ultimate purchaser.
- Employer inflates the purchase price of the home in order to get more money into the hands of the employee. Stay consistent with the determination of fair market value and treat any amount in excess of FMV as a taxable benefit subject to payroll tax withholding.
- Orchestrating EVERY home purchase with the employee to be the same day as the closing settlement with the outside purchaser will demonstrate no risk of ownership. Let your employee purchase happen at the later of vacate or offer acceptance, and do not manipulate the process or you will fail to show you have the burdens and benefits of home ownership.
- Employers limiting the amount of closing costs they will cover. By having the employee pay for some of the costs, employers are tying the employee to the second sale and making the benefit taxable. Employers must treat themselves as any other home seller and pay typical selling costs.
- Employers sell the home to the ultimate buyer for a higher price than that paid to the employee, and passes back the profit to the employee. Always treat the offer with the employee as unconditional and non-contingent, and do not let the ultimate sales value nor buyer repairs affect the transaction you completed with the employee.
- Employers give employees an unlimited amount of time to sell their home within a BVO program. This is a sore point for some IRS auditors. Consider implementing a “Sunset Clause” in which the BVO switches to a GBO down the road, with the appraisal process kicking off after 180 of marketing, for example.
- Employee fails to utilize an exclusion clause when listing their home with a real estate broker. Without this, the employee will have a legal obligation to pay the broker a commission when a ready, willing and able buyer is found. Payment of this employee obligation becomes a taxable benefit when paid by the employer. Ensure that a proper exclusion clause is always utilized.
- Employer failing to enter into their own listing agreement with the listing broker. Obligation for commission will then fall back on the employee who originally listed the home. Payment of that commission by the employer will again create a taxable benefit to the employee.
- Employer has the employee execute forms like Assignment of Proceeds or Power of Attorney in order to complete the transaction with the ultimate purchaser. Such documents are viewed by the IRS as inconsistent with the position that the company is the owner of the property and free to dispose of it as it chooses. Generally such documents are not required, but if used the POA should be carefully crafted to limit its use to correcting errors, or completing deeds.
- The employer’s home purchase contract does not clearly spell out the assumption of liability the company is assuming as to satisfying the employee’s mortgage and holding the employee harmless from that liability. All documentation and contracts need to support that burdens and benefits of home ownership are being borne by the employer, so avoid email communications and negotiations between the employee and the new buyer as well.
Definitions, Language and Nomenclature
Employers need to insure that descriptions used in internal memos, correspondence, procedures and policy are consistent in defining the relocation process as the “purchase” of employee homes, and the company “owning” those homes through unrelated arms-length transactions. Terminology should avoid use of words and phrases that suggest the employer is selling the home “on behalf” of the employee, that the employee is “assigning their interest” in their home to employer, that the employer is “assisting” the employee with “their sale to an outside purchaser” and should avoid such terms as “equity buyout”. EVERYTHING should support the concept that the employer is acquiring the home and as the new owner can dispose of it as they choose to.