Q&A WITH CARTUS CONSULTING

Transcription

1 & WITH CRTUS CONSULTING June 2012 SM

2 Cartus Consulting guides organizations of all sizes to the best solutions in global mobility and mobile workforce development. This is the first issue in a series where Cartus Consulting Services group answers the most frequent and topical questions asked by our clients. In this issue, we answer questions received from clients regarding domestic U.S. home sale, including reimbursement of the homebuyer tax credit, short sales, loss on sale, and home purchase assistance.? Have a uestion? cartusconsulting@cartus.com Should a company honor a relocating employee s request to reimburse the homebuyer tax credit? The quick answer is no, it is not recommended that a company reimburse the homebuyer tax credit. Transferees who received a homebuyer tax credit when they purchased their home often request reimbursement when notified about relocation. However, at that stage, it is still unknown if the credit will need to be repaid. First, the employee will need to sell and close on the sale of the home to establish the sale price. Second, the employee will need to complete complex tax forms in the year after the closing occurs to determine how much, if any, credit is due for repayment to the IRS. The current housing market works to the employee s and company s advantage regarding the tax credit because generally, if there is no gain on sale, repayment of the tax credit is not due. If a company does decide to reimburse the homebuyer tax credit, it is recommended to provide a written statement to the employee with specific terms for the reimbursement. For example, up to the full amount of the received tax credit will be reimbursed upon review of the original tax return where If a company does decide to reimburse the homebuyer tax credit, it is recommended to provide a written statement to the employee with specific terms for the reimbursement. the credit was listed, and review of the tax return completed in the year after the sale. If the home sells and closes in 2012, the employee won t submit tax forms regarding the sale/tax credit until ny reimbursement is taxable income and the company will also need to determine its stance on gross up of this reimbursement. It is important to note that if the employee purchased the home in 2008, the program in effect at that time was for a 15- year repayable loan, not a credit. The homebuyer tax credit will be an issue for sales through 2013 (three years after the last tax credit program went into effect). For more information, please listen to our podcast n Update to the Homebuyer Tax Credit on the Cartus Blog. Page 2 of 5

3 One of my transferring employees owes more than his house is worth. Would a short sale help him get out from under his departure home? short sale is definitely one of the tools that may be available to help your employee. Short sales are home sales where the lender agrees to take a payoff that is less than the outstanding balance on the mortgage loan. There are a number of factors to consider when determining your organization s policy on short sales: Talent management how badly do you need this employee in the new job/location? Cost do you provide a company-supported program, such as through Cartus, or a guaranteed buyout home sale? Implications of no support will a short sale leave the employee mired in paperwork and ultimately result in a failed relocation? When determining your organization s policy on short sales, consider the impacts on: Talent management Cost Implications of no support It is important to establish a policy on short sales for consistency and fairness. lso, consider doing some due diligence upfront, before the employee or candidate must make a relocation decision. formal or informal candidate assessment program gives the employee the opportunity to bring forth issues that may complicate the relocation, or de-select from the relocation, if need be. This assessment program also allows the company to be proactive rather than reactive. nother consideration regarding short sales is loss on sale. If you have this component in your policy, and the employee is eligible for loss on sale assistance, do you provide it? In most cases, lenders in a short sale situation will be looking at all of the employee s assets, including loss on sale payments. The payment remains taxable income to the employee, but can help reduce the debt owed to the lender, thereby providing a benefit to the employee. It is also important to remember that some lenders will not release the remaining debt, and the employee could be liable going forward. ccording to a recent Cartus Consulting survey, over 50% of companies have a loss on sale policy or administer on a case-by-case basis. In the same vein, an employee will want to receive their home sale incentive in a short sale situation, if he or she is eligible. The intent of the incentive is to keep a home out of inventory, or allow for a timely sale. If this was accomplished, the employee will take the position that the incentive should be paid to him or her. Generally, an employee should not be penalized for something that is likely beyond his or her control, so the short sale should not result in benefit reduction. However, lenders will treat the home sale incentive as an employee asset, similar to loss on sale as noted above. If you are interested in the short sale process, please see a MOBILITY magazine article Short Sales and Clawbacks and Lies Oh My! written by Bruce Perlman, senior vice president and general counsel of Cartus. Page 3 of 5

4 We ve been approving loss on sale on a case-by-case basis. How do I establish a policy for loss on sale? The impact of the downturn in the real estate market is still being felt and you are not alone in your desire to establish a structured loss on sale policy. The most commonly noted caps are $50,000 and $25,000, but we have found that companies will go above the caps for certain employees, based on job level and circumstances. The results of a recent Cartus Consulting survey confirmed that most companies are not including capital improvements in their loss on sale calculations, recognizing that capital improvements are reflected in the overall value of the home, and to include them in a loss on sale calculation is double dipping, in a sense. Our recommendation is to remove the points/ loan origination fee from your relocation policies or institute a sliding scale. There is no right or wrong way to establish a loss on sale formula. Some companies will cover 100% of the loss, with a cap. Others will require some contribution from the employee, either as a percentage of the loss and/or a dollar amount. For example, the first 5% of the loss, or the first $10,000, would be required of the employee before the company would cover any loss. Companies may even institute a sliding scale for loss on sale; for example, 100% of the loss up to $10,000; and 85% of the loss up to $25,000. lso, when determining the formula, don t forget tax gross up. Will it be included or not? While most companies gross up loss on sale in order to provide a more effective benefit, the lack of gross up should be considered when determining caps and calculations. If your company provides a guaranteed buyout, another option is to provide a lower level of loss on sale coverage for those who accept the buyout. For example, 100% of loss covered if the employee sells through the amended sale process, but only 90% covered if the employee accepts the buyout. This also acts as another incentive for the employee to market the home for as long as possible. Company culture and budget constraints may dictate your company s formula. The loss on sale benefit may also factor into talent management needs as this benefit often has a large impact on the financial feasibility of a relocation for certain candidates. lso, consider your traffic patterns and how often your employees are expected to move. If company culture dictates frequent relocation, employee participation in loss on sale may serve as a deterrent against impulsive home purchases. nd what if you don t have a loss on sale benefit and have not had any issues? This too can be the case, and don t feel like you should add the benefit just because you think everyone else is. In certain companies, industries, and locations, loss on sale is not needed. The expectation is set, loss on sale is not provided, and employees/candidates make the job or relocation decision knowing that upfront. Page 4 of 5

5 Interest rates are really low. What changes should I be making to the new home purchase assistance benefit? With interest rates at historic lows, now is the time to make some changes to the new home purchase assistance in your policy. Consider that the vast majority of lenders are quoting fees without discount points and/or loan origination fees. In addition, lenders recently admitted that the loan origination fee acts like a discount point (which lowers the interest rate for the life of the loan). Each point, usually equivalent to 1% of the loan amount, lowers the interest rate by.125 percent for a 30-year loan. So let s illustrate this: Loan mount $200,000 Interest Rate 4% 30-year interest rate (no points) 3.875% 30-year interest rate (1 point - $2,000) Monthly Principal & Interest $ $ Monthly Difference (no points vs. 1 point) -$14.36 Cost to Company $2,000 It will take over 11 years for the employee to reap the benefit of that $2,000 spent. In the meantime, the lender is the one who benefits, especially if you relocate employees often. Our recommendation is to remove the points/loan origination fee from your relocation policies. If you are resistant to do that because interest rates will rise in the future, you can institute a sliding scale based on the 30-year Fed rate. For example, if rates are under 8%, no points/loan origination fee are offered; if rates are 8.01%-9.5%, offer 1 point; if rates are over 9.51%, offer 2 points, etc. The sliding scale rates and number of points can be customized to best fit your needs.? Have a uestion? cartusconsulting@cartus.com Page 5 of Cartus Corporation. ll rights reserved. Cartus and the Cartus logo are pending or registered trademarks of Cartus Corporation.