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Avoid tax roadblocks for relocation assistance

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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 tax-wise.

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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