Between 95 and 98 percent of companies provide home sale benefits of some sort to their relocating employees. Of this, more than 70% will offer a structured home sale program, such as a Buyer Value Option (BVO) or a Guaranteed Buyout (GBO). With the BVO program being the more popular option, there are a few things to know if you run this type of program or are thinking about offering it to your relocating employees.
Let’s start by reviewing the question: What is a BVO Program?
In short, A Buyer Value Option is a formal home sale program provided by an employer to a relocating employee that follows certain steps, most importantly including two separate and independent home sales, that can provide preferential tax treatment for the employer. Pretty simple, right? Provide a BVO, save money! Well, yes, and…not exactly.
So why or how do you get preferential tax treatment with a BVO? When approaching the tax topic, it is important to note that the IRS has never specifically made a ruling or a formal statement on the tax treatment of a BVO. With that said, the IRS has made preferential rulings on other structured home sale programs in Rev. Rul. 2005-74 (which can be found here); these programs are very similar to the BVO.
If you choose to read the whole IRS ruling, grab some coffee first because it is long and detailed! All joking aside, companies can get preferential tax treatment on the BVO program because they are taking an acceptable amount of risk on the buying and selling of the home. By taking on this risk, the IRS views this as a nontaxable event.
So, why is the nontaxable event important? If you provide a direct reimbursement for your employee’s home sale closing costs, essentially giving them cash once they sell their house to cover the costs, this is considered taxable income to the employee. If you have taxable income, Uncle Sam wants a cut. This would mean that you, as the employer, must cover the cost via gross-up or the employee is left with a tax liability. The majority of employers want to eliminate or limit the employee’s tax liability, so they will pay the gross-up, which can add up quickly!
This is where the cost savings of the BVO program comes into place. The employer is taking the risk that the home could potentially fall into inventory and the company would have to pay the ongoing costs associated with that home. In the two-sale process, the employee is free and clear of the home and the burden of owning the home falls onto the employer. From the IRS’s vantage point, two-sale process equates to financial risk and taking on that financial risk entitles you to tax benefits.
If you are still reading this, you are likely wondering what the necessary steps and procedures are that must be taken to satisfy the IRS into viewing this as a nontaxable event. The Worldwide ERC provides their recommended 11 Step Process here; however, you might notice that the Buyer Value Option is never mentioned. This is because there is no ruling on the BVO, but rather the ruling is on the Amended Value Option. There are slight, yet significant, differences in these types of home sale programs which impact the IRS ruling.
There are a lot of numbers to look at and decisions to be made if you are thinking about moving to a BVO program. There are great benefits in terms of cost that could be realized, but those benefits do come with financial risk. There is no such thing as a free lunch! If you would like to explore what the potential realized benefits could be to your mobility program, please reach out, and Aires can provide you with further information along with some useful calculators to assist you with your decision.