April 7, 2020

Navigating Home Sale Buyouts in the Current Business Environment

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Apr

07

Navigating Home Sale Buyouts in the Current Business Environment

COVID-19 is steering the real estate market in a new direction, and you may be wondering how this will affect home sale transactions for your employees. As we navigate these new territories, here are a few things to consider as you balance duty of care as it relates to providing your employees with Home Sale Assistance.

Extending the Company Buyout Offer

In the current environment, employees may be asking, "Can you extend the expiration date of my company buyout?" It seems simple enough, but here's what you need to know:

What to know about the company buyout:

  • If a company buys a home from an employee at its fair market value, the sale will be treated as bona fide at that price by the IRS.
  • If the value exceeds the established fair market value, the excess is considered compensation to the employee, rather than part of the sales price of the home.
    • If the excess amount is not treated as compensation with proper tax withholding, the payment of employment taxes, and inclusion on the employee's W-2, substantial penalties may be incurred.

Simply put, this may be considered a "Directed Offer" with tax implications if the market is declining, as the appraised values are outdated and you are "directing" something other than "fair market value." In an improving market, the offer would still be directed, but there would be no tax impact.

That said, not all company buyout extensions would be considered Directed Offers. Here are two examples to consider:

Client A:

  • Company Buyout: $500,000
  • Based on 120-day marketing timeframe
  • 60-day acceptance period

Client B:

  • Company Buyout $500,000
  • Based on 120-day marketing timeframe
  • 120-day acceptance period

iStock-1139919425-450px.jpgIf Client A extends the acceptance period up to 120 days, this would not be a Directed Offer, as the value is still within the established marketing time and fair market value.

If Client B extends the acceptance period past 120 days, this could be a Directed Offer, as the value is outside of the established marketing time and may not be fair market value.

What Should I Consider, and What Is My Risk?

Key questions to ask yourself when establishing your strategy include:

  • Are the appraised values still valid, or have they passed the 120-day mark?
  • Is the market declining?
  • If making exceptions, am I applying them across the board to all employees in the Home Sale Program?

If the answer to these questions is "no," consider the following risks:

  1. Tax consequences
  2. Increased IRS scrutiny around your Home Sale Program and the potential for IRS audit and fines
  3. The appearance of going against the IRS guidelines of "fair market value"—aka, a Directed Offer
  4. Resale loss

Best Practice Recommendations:

  • If you are considering any exceptions to the company buyout offer, contact your Cartus account manager.
  • Be consistent in your exception approach: if you approve an exception for one employee, be prepared to apply the same to all.

 


Please visit the Cartus COVID-19 Content Hub for a variety of information and resources related to the current global mobility landscape, including webinars, white papers, survey data, and more.

Picture of Jessica Olmstead

Posted By

Jessica Olmstead

About Jessica

Jessica is a Client Services Manager supporting clients in implementation, policy delivery, and service excellence. Proficient in U.S. home sale, Jessica strives to anticipate her clients' needs and challenges while proposing solutions that drive policy consistency and compliance. Jessica has 16 years' experience in the relocation industry in both Operations and Account Management as well as Global Learning and Development.

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