2012 Tax & Legal Update

Transcription

1 2012 Tax & Legal Update This issue of Mobility Insights takes a look at the tax and legal landscape as it pertains to relocation in 2012, including issues that are not new, but are still relevant; issues that are new and deserve some focus; and what s coming around the corner. What s Old But Still Worth Talking About? There are several areas that are not new, but still worth taking a look at since they are still in play: namely, short sales, the Homebuyer Tax Credit, the One-Year Rule, and IRS audits. National statistics estimate that one out of every four homeowners is underwater on their mortgage. Relocation for employees with negative equity is possible, but is an involved process. Short Sales With national statistics estimating that one out of every four homeowners is underwater on their mortgage, meaning simply that they owe more on their mortgage than the home is worth, it is clear that short sales are not going to be going away any time soon. Cartus own relocation population is consistent with that one out of every four estimate. For an employee considering relocating for your organization, this can be a critical issue. There are several solutions available to homeowners in this situation, all having pros and cons. Write a check for the shortfall: Pro: Writing a check preserves the employee s credit. Con: Not everybody has the cash available to cover the shortfall and even if they do, they may not want to write a check for an underwater mortgage. Walk away from the home and allow foreclosure: Pro: It may be much more satisfying to walk away from a home than to make mortgage payments with no potential for building equity. Con: A foreclosure seriously damages an employee s credit rating for years, and can stay on their credit report for up to seven years. File bankruptcy to prevent foreclosure: Pro: The employee has a clean slate that doesn t completely preclude them from getting credit (albeit at higher rates). Con: Bankruptcy is a complicated procedure that may not even save the house in the end. Also, bankruptcy adversely affects an employee s credit rating and can stay on the credit report for up to 10 years. Find a buyer (which could be Cartus) and present the offer to the lender as a short sale, offering all proceeds from the sale as payment in full for release of the mortgage lien: Pro: A short sale is not as damaging as a foreclosure or bankruptcy to the employee s credit rating. Con: Short sale paperwork is very intensive; lenders and servicers are overwhelmed and have little flexibility. The short sale process for relocation homes presents a square peg in a round hole dilemma, because many lenders do not understand the relocation process. Lenders often demand a noflip clause, where the buyer cannot resell the home for up to 90 days. This doesn t work well in a relocation context when Cartus and its clients are trying to sell homes and minimize inventory times. Second loans can also cause an issue as the first lender is trying to give the second lender as little money as possible, and the second lender is trying to get as much money as possible. PAGE 1 OF 5

2 You may want to consider making policy revisions for employees that have short sales, since that money goes to the lender and not your employee. Probably the most hotly contested area we re currently seeing for short sales is the loss-on-sale benefit. If you haven t already encountered this, you should be ready for spirited debates with employees who want to keep their loss-on-sale and resale-loss funds. Your employees need to know that the lender wants disclosure of all sources of funds and proceeds from the sale of the home. The employee and Cartus need to sign a document attesting to the fact that the bank will get all monies from the sale of the home, and lying on this document is bank fraud. Naturally, employees don t like this; they see loss on sale as a benefit that is due to them and not as homesale proceeds. Clients may want to consider making policy revisions for employees that have short sales, since that money goes to the lender and not your employee. Homebuyer Tax Credit The Homebuyer Tax Credit was introduced in an effort to jump start the U.S. economy and give homebuyers the chance to take a credit on their federal tax return and a way to subsidize the down payment and purchase of a new home. You might ask, since the tax credit was only applied to homes purchased in prior years, why is this topic still worth talking about? Well, these houses are just beginning to enter into the relocation cycle again, and you will want to be prepared for employees who want to know whether or not you will cover their obligation to repay the tax credit. Tax credit repayment rules are complex; some employees will be required to repay the tax credit and others will not. The 2008 tax credit is repayable over 15 years. The tax credit law from subsequent years requires no repayment, unless the home is no longer used as a primary residence within 36 months of the tax credit. So, if you are moving someone who used this credit to buy their departure-area home a couple of years ago, you may be facing a request for reimbursement of their credit repayment obligations. Decide whether or not you want to accommodate the repayment of the home buyer tax credit for your transferees in your gross-up computations Pros and Cons of Reimbursing the Homebuyer Tax Credit Pros: Keeping the employee whole, that is, not punishing an employee for taking a relocation at the employer s request. In the spirit of fairness, if not for the relocation, the employee would have had the full 36 months in the home. Cons: Very individualized math. (What credit did the employee take? How much of a credit did they take? Will they share their 1040 for a prior year?) Very similar to over-investment in a pool or other amenity for the home the employee didn t get the time to enjoy these amenities and the employer caused this by making the employee relocate. So, give some thought now as to whether or not you want to accommodate the repayment of the Homebuyer Tax Credit for your transferees in your gross-up computations. Requests from employees may be coming, if they haven t already, so it s better to have a plan in place before you have these conversations. One-Year Rule The One-Year Rule, which basically defines the maximum amount of time that the household goods shipment of a business-motivated relocation will be supported by the government through tax advantages to the employee, is not a new issue. Just as a refresher, there are two key takeaways you need to remember. First, the One-Year Rule only pertains to household goods and the family s final move, not home sale or other relocation benefits. Second, it should not absolutely be considered one year. For instance, in one case a family was allowed 16 months so that their child could finish school. Another revenue ruling permitted 30 months for child education. However, in a U.S. Tax Court case a delay of 24 months was rejected as inappropriate, and it was seen that the taxpayer was just being fussy about buying a new house. It all boils down to whether or not it is an external cause (the transferee just can t move) or something more internal (they just don t want to move.) What is not clear is whether the IRS will agree that one year can be extended due to the employee s inability to sell the home at a reasonable price due to economic circumstances. PAGE 2 OF 5

3 IRS Audits IRS audits still continue and your focus needs to be on the risks of corporate ownership of homes and compliance with Tax Ruling Pete Scott, Worldwide ERC s tax counsel likens it to being on a teeter totter. If you want less inventory risk, you re going to run a higher risk on audit. If you want to have a lower risk on audit, you re going to have higher inventory costs. We encourage everyone to look at the 11 steps of an amended sale and identify where your organization is on the teeter totter, and see if you are comfortable there. What s New? Is there a new real estate sales tax? One of the questions we re hearing quite frequently from clients is whether or not there is a new real estate sales tax and, if so, how does it impact their U.S. employees? As part of the Patient Protection and Affordable Care Act of 2010, a change was made to Medicare taxes. It applies to a very small subset of the U.S. population (and likely a very small number of your employees): It applies to the top three percent of all U.S. earners, that is: Married taxpayers making over $250k in taxable income, or, Single taxpayers making over $200k in taxable income. Of that group, it affects those who made a profit on their homes of more than the $250k single/500k married exemption amount. If a profit is made, a tax is imposed as 3.8% of the amount of their profit that exceeds the 250k/500k amount. Even though this new Medicare tax affects a limited number of transferees, you may be asked by some employees if you will be reimbursing or grossing up for this, so it is better to be prepared with your position. This tax goes into effect January 1, Even though this affects a limited number of transferees, you may be asked by some employees if you will be reimbursing or grossing up for this, so it is better to be prepared with your position. This is a very personalized analysis, and depends largely on company philosophy. On one hand, again, is the concept of fairness and keeping the employee whole. After all, it could be that their base salary would not have caused them to be in this income range, but their relocation benefits pushed them into this taxable income category, so it is only fair to reimburse or gross up. On the other hand, this employee may be at a modest salary level but has other earnings that push them into this category (e.g., stock market gains, outside business income, etc.) In that case, is this really your responsibility? There are a couple of great resources for researching this issue further: There is a very good posting by Worldwide ERC s Tax Counsel Pete Scott: New Medicare Taxes On High Income Taxpayers To Go Into Effect After Supreme Court Healthcare Decision Gil Saunders, a member of the Cartus legal team, posted to the Cartus Blog: The Affordable Care Act Impact on Relocation Home Sales Snopes.com is a great web debunking resource that has covered this issue at some length and has taken a closer look at what is true and not true. Credit requirements are much tighter than before the mortgage meltdown, and some houses that were financeable in the past might not be now. This can impact relocating employees on both the departure and destination sides. Is It really that tough to get a mortgage? The simple answer to that question is, yes. Credit requirements are much tighter than before the mortgage meltdown, and some houses that were financeable in the past might not be now. This issue hits relocation in two places: departure and destination. On the departure side, the employee may have issues that they didn t have when they purchased the home in 2007 or before. Some of those issues include: Open work permits: it is very important that you have your permits available for any work that has been done on the home, and make sure that they are closed out after work is completed. Private roads: this wasn t an issue in the past, but lenders now want to see that there is an agreement among all parties along any private road concerning responsibility for maintenance and costs. Homeowners association litigation: if there is any pending homeowners association litigation, lenders will not lend and the homeowner needs to find a cash buyer. PAGE 3 OF 5

4 On the destination side, it s now harder to get a mortgage in general, but it s especially difficult if you ve had a short sale, deed in lieu of foreclosure, or foreclosure. Generally, whether or not you ve had a short sale or foreclosure, you re going to need more of a down payment and better credit than before the mortgage meltdown. Paperwork in all cases is much more intense than in prior years. Overall, these issues hurt your employees on both ends. You and Cartus need to be even more careful to identify issues up front as we buy houses, and you may need to be prepared for your employees having a tougher time on the destination end. What s Around the Corner? Back to the Future So, what s so bad about an improving real estate market? Two words bidding wars. It s been six or more years since we ve really seen bidding wars, and they can cause some conflicts. To some extent, Cartus and your organization s interest diverge a bit from your employee s. The employee naturally wants to get the highest price for their home. Cartus is looking for not only the highest offer, but the best; one that will close, that will appraise well, with a buyer that has enough money for a down payment, etc. Let s look at an example. Let s say your employee verbally agrees to a sale of their home at $200,000 and the transaction is moved over to Cartus. Over the next weekend, another buyer said they would like to make an offer at $215,000. In this scenario, there is only upside for the employee in taking this second buyer. There is only downside for you and Cartus if the first buyer doesn t go away quietly. There are four scenarios that can happen: 1. The first buyer bumps up their offer to $215, The first buyer agrees to just go away 3. The first buyer agrees to go away quietly, if they are paid their mortgage application fees and inspection charges 4. The first buyer sues and puts a lien on the home. Meanwhile, the second buyer doesn t want to wait out this drama and the house comes into inventory at Cartus, costing you money Cartus will always consult with you on direction since, if we reject the higher offer, your employee will be irritated. If we accept the higher offer, and a lien is placed on the home, neither you nor Cartus will be pleased. It s a between a rock and a hard place situation and each instance needs to be evaluated closely. On the plus side, bidding wars are signs of a strengthening real estate market. From that perspective, this is in that rare category of a welcome problem. s as a binding agreement In general, we ve all learned that in real estate, if it is not in writing, it is not binding. The digital age is eroding that maxim, and the courts are beginning to recognize this. There have been an increasing number of cases being decided that hold that an exchange of s can create a binding contract. For example: 1: Wanna sell your house at 10 Maple Street? 2: Yup. 3: Will you take $275k and get out by Halloween? 4: Yup. Does this constitute a contract? Well, you have an offer, acceptance, and agreement on basic terms, including price. Courts in New York, Massachusetts, and Tennessee have found that s can equal a binding contract. So what has Cartus done to address this issue? As an example, we now include a special disclaimer footer on the s coming from our real estate services group, basically stating that this is not binding for contractual purposes. We ve trained our broker network, and are exploring additional ways to educate relocating employees on the importance of communicating through their network agent rather than directly with the buyer. PAGE 4 OF 5

5 What you should know: Be prepared for employee requests for reimbursement before they happen Balance keeping your employees whole and drawing the line at what you are responsible for Realize that due diligence and intense paperwork will cause mortgage delays Be aware of the rules regarding s as binding agreements Digital signatures We re seeing an increasing number of ways in which digital signatures can be used, but it s important to know what a digital signature is. A digital signature is an electronic acceptance of a document through a third-party certification. The third party is certifying that it is a valid signature, authentic, and that the document hasn t been changed. This third-party process is very important because you want to know that, if you have a dispute and need to go to court in 3-5 years, that you have what you need to be admissible in court and that you have a good audit trail. Our recommendation is, if you are going to a third-party for digital signatures, to complete your due diligence on each authentication provider. Cartus performs due diligence on providers used by your employees, by real estate agents, and any other third-party provider. We are currently in pilot with one provider, looking to see if we can endorse that provider and use digital signatures on more of our documents. In Summary So just a few final words to wrap up this overview of tax and legal issues: Short Sales and Foreclosures: Be prepared for requests from employees who want to keep their loss-on-sale and resale-loss funds. Homebuyer Tax Credit: Give thought now as to whether or not you want to accommodate the repayment of this credit for your transferees in your gross-up computations. Again, be prepared for requests that you re likely to receive from your employees. New Medicare Tax: Understand that this is not a sales tax on all real estate and will likely not impact most employees. Give some level of thought as to whether or not you are willing to gross up those few employees who are impacted. Understand that in order to do so, you are going to have to ask some pretty intrusive questions to see why the employee is impacted. Mortgages: The ever changing mortgage requirements are requiring a higher level of due diligence when buying homes, with the potential to impact, and possibly disappoint, employees on both the departure and destination ends. The Buyer #1 vs. Buyer #2 dispute: Understand the dynamics; there is only upside for your employee and there is no perceived downside. There is only downside for you and for Cartus. Again, we will always want to make these decisions with you. s as binding agreements: For U.S. home sales, be sure your employee follows Cartus directions in how to best communicate always with and through the broker never directly with the buyer. Bruce Perlman, SVP, General Counsel, SCRP Cartus Bruce joined Cartus in 1991 and was named senior vice president and general counsel in He has lectured extensively and written many articles on tax and legal topics related to global relocation issues. SM trustedguidance@cartus.com 2012 Cartus Corporation. All rights reserved. Cartus and the Cartus logo are pending or registered trademarks of Cartus Corporation. connect with cartus Pamela Uhl, VP Associate General Counsel Cartus Pamela s focus is on the support of the domestic corporate relocation businesses. Pamela is admitted to practice in Connecticut and Pennsylvania and has been with Cartus for the past 11 years. For more information, please trustedguidance@cartus.com PAGE 5 OF 5