If your company
has to transfer an employee,you may help by providing relocation services. For
instance, you might arrange for the sale of the employee’s home to a third party
through a relocation firm.
Advice:
Set up an
agreement with no tax strings attached. Unless you’re careful,the arrangement
could result in taxable income to the employee.
Basically, it
boils down to this: If the IRS says only one home sale is taking place during the
transaction, the employee is liable for tax relating to carrying charges before
the final sale to the third-party buyer. If two sales are involved, the employee
is off the hook taxwise.
In a new ruling,
the IRS provides guidance for three common situations: (IRS Revenue Ruling 2005-74)
Example
1: The employer
contracts with a relocation management company to provide assistance, including a
home-purchase program, for the employee. The relocation company purchases the home at
its fair market value.
Result:
There are two home
sales. Thus,any expenses incurred by the employer on the second sale aren’t
treated as taxable compensation paid to the employee.
Example
2: The facts are the
same as in Example 1, except that the contract allows the employee to list the
home with a broker to market to potential buyers under an“amended value” option.
If a higher offer is obtained, the relocation management company must buy the
home at the higher price.
Result:
This option doesn’t
change the fact that there are two sales.
Example
3: The facts are the
same, but the relocation company isn’t required to offer the higher amount until
it enters into a sales contract with a third-party buyer. The employee can reject
any offer.
Result:
In this case,
there is one sale for tax purposes. So, the expenses are treated as taxable
compensation to the employee.
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