Tax Consequences of Home Purchase Programs

HOME SALES FOR JOB MOVES

hen employees are asked to relocate to a new job site, employers often offer various benefits—including home purchase programs—to ease the transition. Using three examples, revenue ruling 2005-74 explains the tax consequences to employees and employers; CPAs should become familiar with them.

FACTS
In the ruling an employer either arranges to purchase an employee’s home at a certain price or contracts with a third-party relocation company to act as its agent and administer a buyout.

In the first scenario the employee effectively sells the residence to the employer via the relocation company; the buyout price is generally the average of two or three appraisals. The property is transferred to the agent. The employer later sells the property to a third-party buyer at a loss.

The second scenario is the same, except the buyout price may be determined by an “amended value option” under which the employee can hire a broker to locate a prospective buyer who will offer more than the appraised value. If such an offer is made, the employer—through its agent—purchases the home at the higher bid price. The employer may or may not sell the property to that prospective buyer. If it does, the employee is not entitled to any part of the sales price the employer receives that exceeds the amount the employee received for the home.

The third scenario is the same as the second, but the employee’s sale of the home to the employer at the higher amended price hinges on the employer’s entering into a contract (acting through the agent) with the actual prospective buyer the employee located. The employee also retains the right to negotiate the sale of the residence to that buyer. Further, the employee receives proceeds representing the higher amended value, provided the sale of the home to the third-party buyer closes.

ANALYSIS AND HOLDINGS
Applying a benefits-and-burdens analysis to the above scenarios, the ruling concludes that, in the first two, the overall transaction actually resulted in two separate sales: the employee’s sale of the residence to the employer and the employer’s sale to the third-party buyer. The employee recognizes taxable gain on the disposition of the residence, unless it is excluded from gross income by the IRC section 121 principal residence exclusion. However, the employee does not have taxable compensation income for the employer’s costs, if any (that is, property taxes and mortgage payments).

On the other hand, if the transactions are treated as one sale (as in the third scenario), the employee’s gain on a disposition is taxed the same way, but the employer’s expenses are compensation income to the employee under sections 61(a)(1) and 82.

UNANSWERED QUESTIONS
The ruling does not address the employer’s payroll tax obligations, its income tax consequences on the property’s acquisition and subsequent sale, or whether the residence is a capital or ordinary income asset in its hands.

RECOMMENDATION
An employer that offers a home purchase program should be aware of the tax outcomes for itself and its employees.

For more information, see Tax Clinic, “Tax Consequences of Home Purchase Programs for Relocating Employees” by Carlisle F. Toppin, in the March 2006 issue of The Tax Adviser.

—Lesli S. Laffie, editor
The Tax Adviser