In a previous Aires blog post about the Buyer Value Option (BVO) home sale program, we explored what a BVO program entails, the benefits to the corporate client, the benefit to the transferee, and some of the tax insights behind it. In this post, we will meet the older, more sophisticated sibling of the BVO – the Guaranteed Buyout (GBO) home sale program. As the name implies, with this program, there is a guarantee to buy the transferring employee’s home after a designated marketing period, making it far more generous than a standard BVO program.
The reason you may not have heard too much about the GBO program is that it is typically, but not always, reserved for the highest-level relocations (think VPs, executives, and the C-Suite). This is because the company assumes more inventory risk and, as a result, more costs than a BVO program.
Buckle up, and let’s get into some GBO details.
- To start the process off, we need to set a price for the home. Once price is established, the relocation management company will buy the house from the employee on behalf of the corporate client. This is most commonly done by conducting two Worldwide ERC® Relocation Appraisals to determine "fair market value."
- The home will be marketed at this price and – fingers crossed – sell quickly! If that happens, everyone is happy. If the designated marketing time (usually 60 or 90 days) lapses, the real “fun” of the GBO happens.
- The relocation management company, much like a superhero, swoops in to purchase the house from the employee, thus saving the day or, at minimum, saving the employee from the burden of selling their house. At this point, the employee is free-and-clear of any financial responsibility from the home.
- To entice the employee to sell the home more quickly, there is typically a home sale bonus that is paid directly to the employee if the home sells and the property closes during the designated marketing time. This might sound odd, but it is much better to pay a small home sale bonus to get the sale done quickly than to pay the carrying costs of the home after the GBO takes place. After all, someone needs to pay for the ongoing costs of a home after the employee is no longer involved.
During this whole process, the 11 key steps for a tax protected home sale (i.e., steps to ensure you are running a compliant home sale program as outlined by the Worldwide ERC®) is critical. This ensures advantageous tax treatment for both the employee and the corporate client.
To quickly sum the compliance piece of a GBO up, the IRS says that by doing a formal home sale process, corporations are taking on the risk as the owner and thus incurring costs for possible loss, carrying, maintenance and repairs to the property – making it a business expense as compared to a direct reimbursement payment or benefit to the transferring employee. Since it is a business expense, it can be excluded from the transferring employee’s taxable income. This will save those precious gross-up funds for the corporate client.
The very clear difference in the BVO and GBO is the relief that the employee receives knowing that their home will no longer be their responsibility if it does not sell quickly. Often, the transferring employee is a critical person within a company and having them actively solving the most pressing business needs far outweighs the potential extra costs associated with the GBO program. In addition to the tax and employee benefits, this can be a wonderful benefit to entice your next critical relocation or new hire.