Revenue Ruling 83-39: Employee Home Sale Loss

Revenue Ruling 83-39 from the Internal Revenue Service (IRS) addresses the tax implications of an employer reimbursing an employee for a loss on the sale of a personal home. This situation arises when an employee is required to move for work-related reasons. The ruling clarifies how these reimbursement payments are classified and taxed, providing a framework for both the individual receiving the funds and the company making the payment.

The Core Scenario of Revenue Ruling 83-39

Revenue Ruling 83-39 applies to a specific set of circumstances involving employee relocation. The foundational requirement is that an employee is transferred from one official work station to another for the benefit of the employer, not for the employee’s personal convenience. The move must be a condition of continued employment or a direct result of a company-initiated change in job location.

As a direct consequence of this employer-mandated move, the employee must sell their personal residence. The ruling contemplates a situation where market conditions or the urgency of the move result in the employee selling the home for less than their original purchase price, thereby realizing a financial loss.

The final element of the scenario is the employer’s response to the employee’s loss. To alleviate the financial hardship, the employer makes a payment to the employee to reimburse them for some or all of the loss sustained on the home sale. This payment is not a loan or an advance but a direct reimbursement.

The facts presented in the original ruling illustrate this. An employee, transferred for the company’s benefit, sold a home with an adjusted basis of $70,000 for a sale price of $60,000, incurring a $10,000 loss. The employer then paid the employee $10,000 to cover this exact loss.

Tax Treatment for the Employee

For the employee receiving the reimbursement, the IRS classifies the payment from the employer not as part of the sale of the home, but as additional compensation. This means the amount received is treated as ordinary income, similar to a salary or bonus. It is not considered a capital gain or a reduction of a capital loss related to the property sale itself.

Because the reimbursement is considered wages, it is subject to all standard payroll taxes. This includes federal income tax withholding, as well as Social Security and Medicare taxes under the Federal Insurance Contributions Act (FICA). The employer is required to withhold these taxes from the payment before it is disbursed to the employee.

The distinction is important because losses on the sale of a personal residence are considered personal capital losses and are not deductible for tax purposes. An individual cannot use the loss from selling their primary home to offset other capital gains or reduce their taxable income. By treating the employer’s reimbursement as compensation, the ruling ensures the payment is taxed.

This tax treatment aligns with broader changes made by the Tax Cuts and Jobs Act of 2017. For tax years 2018 through 2025, the law suspended the deduction for work-related moving expenses for most taxpayers. As a result, any employer reimbursements for moving costs that were previously excludable from income are now considered taxable wages, much like the loss-on-sale payment. The primary exception to this suspension applies to certain active-duty members of the Armed Forces.

Therefore, the employee must recognize the full amount of the reimbursement as gross income. If an employee receives a $15,000 payment from their employer to cover a loss on a home sale, that entire $15,000 is added to their taxable income for the year.

Tax Treatment for the Employer

From the employer’s perspective, the classification of the reimbursement payment as compensation provides a clear path for its tax treatment. Because the payment is considered compensation for services rendered, the employer is permitted to deduct the full amount as an ordinary and necessary business expense.

The payment is viewed as a cost of relocating an employee for the company’s benefit, which allows the employer to reduce its own taxable income by the amount of the reimbursement. For a company to claim this deduction, the expense must be both reasonable in amount and directly related to the business.

Furthermore, the employer has specific responsibilities regarding payroll taxes on this payment. Since the reimbursement is classified as wages, the employer must not only withhold the employee’s share of FICA taxes but also pay the employer’s matching portion of these taxes. This includes the employer’s share of Social Security and Medicare taxes.

The employer’s ability to deduct the payment is contingent on it being properly classified and reported as compensation. Failure to do so could result in the disallowance of the deduction and potential penalties for incorrect payroll tax handling.

Reporting and Documentation Requirements

Proper reporting and documentation are necessary to comply with the tax treatment outlined in Revenue Ruling 83-39. For the employer, maintaining clear records is important to substantiate the business nature of the expense. It is advisable to have a formal, written relocation policy or a specific agreement with the employee that details the terms of the reimbursement.

The agreement should specify that the reimbursement is contingent upon the employee’s transfer for company purposes and outline how the loss will be calculated and reimbursed. This formal record-keeping protects the employer in the event of an IRS audit by providing clear evidence of the payment’s purpose.

On the reporting side, the employer must include the full amount of the loss reimbursement in the employee’s total wages reported on their Form W-2, Wage and Tax Statement. The payment should be included in the amount shown in Box 1 (Wages, tips, other compensation), Box 3 (Social Security wages), and Box 5 (Medicare wages and tips).