Tax consequences of home purchase programs for relocating employees.

• Author: Toppin, Carlisle F.

Each year, thousands of employees--current and newly hired--relocate to new job sites annually. For homeowners, there are expenses connected with selling one's home and buying another. To induce employees to relocate and facilitate their transition, employers offer various bundles of benefits; home purchase programs are often among the services provided.

Background

Under a home purchase program, an employer relocating an employee arranges to purchase the latter's home at a certain price; alternatively, the employer may contract with a third-party relocation company to administer a buyout on its behalf. The IRS treats transactions involving a relocation company as conducted by the employer via an agency relationship.

Typically, the buyout results in a two-transaction sale--a sale of the residence by the employee to the employer, followed by a sale from the employer to a third-party buyer. After the first sale, the employer may incur expenses for maintenance, utilities, insurance, property taxes, broker's commission, closing costs, mortgage payments (if the employee is paid only the equity in the home and the employer assumed the mortgage) and other expenses directly attributable to a specific residence. However, the employer may recoup all or part of its expenses through proceeds from the subsequent sale to the third-party buyer.

The tax consequences of home purchase programs vary, depending on the program's structure. Rev. Rul. 2005-74, case law and previous IRS guidance collectively provide insight on the tax effects of such programs.

Rev. Rul. 2005-74

The ruling's underlying purpose is to provide guidelines to determine whether an employer acquired ownership of a residence as the property is ultimately transferred from an employee to a third-party buyer during the course of the home purchase program. Once identified as an owner, the appropriate tax treatment may be assigned to a seller-employer, as well as a seller-employee, on the property's disposition.

Overview: According to the ruling, a sale of the home occurs on a transfer of the benefits and burdens of ownership. While satisfaction of the technical requirements for passage of legal title under state law does not necessarily determine ownership, the ability to realize a profit or loss from the sale of property is consistent with ownership. If the benefits and burdens are transferred from the employee to the employer at any point during the program's administration, the employee is...