What Is a Relocation Property & Its Tax Implications?

Defining Relocation Properties and Their Purpose

A relocation property is a home purchased by a corporation or a specialized third-party relocation firm to facilitate an employee’s transfer to a new work location. This arrangement is part of a corporate relocation package, designed to alleviate the burden and financial uncertainties of selling a home quickly.

From an employer’s perspective, a relocation property helps attract and retain skilled talent by offering an incentive for employees to accept transfers. This support also aims to reduce employee stress during a major life transition, allowing them to focus on their new role more quickly. It ensures a timely and efficient transition, benefiting the company’s operational continuity and productivity.

For the employee, a relocation property assures a guaranteed sale for their existing home. This eliminates the need to manage the sale process while preparing for a new job and moving. A guaranteed offer provides financial certainty, enabling employees to plan finances and purchase a new home sooner. During this temporary period, the property is owned by the employer or a relocation management company.

The Relocation Property Process

The process begins when an employer offers a home purchase program to an employee as part of their relocation package. This initiates a structured approach to valuing the employee’s current home. Multiple independent appraisals determine a fair market value. Two appraisals are often obtained, and if their values are within a certain percentage, their average establishes the offer price.

Following the valuation, the employer or their contracted relocation management company (RMC) purchases the home directly from the employee at the agreed-upon appraised value. This transaction provides the employee with financial liquidity and certainty. After acquiring the property, the RMC assumes responsibility for the home.

The RMC then manages all aspects of the property, including maintenance, utilities, and repairs to prepare it for resale. The property is listed on the open market, with the RMC handling negotiations and sale procedures. Real estate agents work with the RMC to market and sell the home to a new buyer. This allows the employee to move without the distraction of selling their former residence.

Tax Considerations for Relocation Properties

The tax implications of relocation properties are a significant aspect for both employees and employers. For the employee, the sale of their home to a relocation company falls under the same tax rules as a traditional home sale. Any gain realized may be eligible for exclusion under Internal Revenue Code Section 121, which allows single taxpayers to exclude up to $250,000 and married couples filing jointly up to $500,000 of gain from a principal residence sale. To qualify, the taxpayer must have owned and used the home as their primary residence for at least two out of the five years preceding the sale.

Any financial loss incurred on the sale of a personal residence, even to a relocation company, is not tax-deductible for the employee. Most other benefits received by an employee as part of a relocation package are now considered taxable income. This change resulted from the Tax Cuts and Jobs Act of 2017, which eliminated many previous tax deductions for moving expenses for most individuals, effective through 2025.

These taxable benefits can include lump-sum payments, reimbursements for closing costs, temporary housing allowances, and household goods transport costs. While these benefits are taxable to the employee, many employers provide additional payments, known as “tax gross-ups,” to cover the employee’s increased tax liability. The exception applies to active-duty military personnel, who may still deduct qualified moving expenses and exclude reimbursements.

For the employer, expenses associated with employee relocation are deductible as ordinary and necessary business expenses. This includes costs of the relocation property program, such as fees paid to relocation management companies, and other direct relocation assistance. When a company or RMC temporarily owns the property, carrying costs like mortgage interest, maintenance, and property taxes are deductible.

The tax treatment of any gain or loss incurred by the company or RMC on the subsequent resale of the property can be complex. In a properly structured two-transaction sale, where the employee sells to the RMC and the RMC then sells to a third party, the RMC’s costs are classified as ordinary business expenses. This structure can avoid costly tax gross-ups for employers. Given the complexities, both employees and employers should seek advice from a qualified tax professional.