The housing markets across the U.S. have been up for some time so many out there may need a refresher on what the term loss on sale even means. Loss on sale is a capital loss suffered by a relocating employee which is the difference between the purchase and sale prices of an employee's home. As housing prices begin to drop, it becomes more common for relocating employees to find themselves in a situation where they are going to lose money on the sale of their home due to the fact their they home is selling for less than they originally paid. This is not quite the same as negative equity, but those two concepts often interact in a given situation. For those relocating, they do not have time to wait out the market until their home sale price gets back above what they paid originally.
To help support this situation, a company's relocation program can consider adding a loss on sale benefit to their relocation policy to accelerate relocating employee mobility and boost satisfaction and productivity. But it does come with a cost.
In the latest (2019) U.S. Domestic Mobility Volume and Cost survey from Worldwide ERC®, the average U.S. domestic relocation homeowner package is costing companies $62,399, and that is a number probably not impacted much by loss on sale benefits because a smaller percentage of companies include it and the housing market has not called for it. So, for a company considering adding this benefit, even if only for a small portion of your relocation volume, it is going to be on top of that +$62k and would be considered a taxable reimbursement, that you would also then need to consider grossing-up to cover some or all of the tax burden.
According to our manager of real estate services Kelly House, "The best approach when incorporating the loss on sale benefit is to cap the total expense for the benefit and design it so that both the employee and the company bear a portion of the loss." In helping companies consider how to structure it, there are many different approaches. Mr. House suggests a popular method where the first $25k is covered by the company, and the next $50k gets a 50/50 split between the company and the employee. So, the total loss on sale benefit would max out at $50k, after a total loss of $75k. Each company however has to decide just how much they can or want to support the employee in this situation as they consider their cap amount. With our clients, we find that maximum amounts range from $15k to $80k, with the median cap amount being $50k.
- The majority that offer the loss on sale benefit, also offer to provide tax assistance.
- A few companies also only calculate the loss on sale benefit as a percentage of the total loss.
- Many companies have the benefit ready, but only break it out on an exception basis for specific situations.
- Capital improvements are not normally considered in the loss on sale benefit.
- Having this benefit available may make the difference for key talent to accept a relocation.
- While there is a cost to the benefit, having this policy will likely offset other exceptions for things like household good storage, duplicate housing and temporary living expenses.
- The benefit can be tiered with different cap amounts per tier.
Here is more from the IRS perspective: FAQs on capital gains, losses and sale of home.
If you work from the philosophy that what goes around comes around again, then we could soon be pointed toward a housing market where the loss on sale benefit will need to be reconsidered and offered. The loss on sale benefit will grow out of economic necessity as companies seek solutions to expedite the movement of key talent in a more volatile real estate market.
Most importantly, when the housing market is experiencing a glut, you need to realize that the price point where you can sell your home is likely to be less than you’d like, and possibly even less than you paid for the house. But remember, if you cannot afford to sell your house for less than you paid, you’re not without options.