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Buyer Value Option (BVO)

Do you know the difference between a Buyer Value Option (BVO), an Amended Value (AV) and direct reimbursement program?  Relocation home sale programs require learning new terminology, new concepts and can be complex and confusing if not explained well.  Some programs may seem similar to each other, but may offer a drastically better solution for both the transferee and the corporation depending on the situation, especially where tax implications are concerned.

What Is a Buyer Value Option?

After the 2018 Tax Reform Bill, all employee relocation related deductions were eliminated. In other words, all relocation expenses became taxable.

However there is one tax protection that remains in the employee relocation process, the Buyer Value Option (BVO) otherwise known as an “Amended Sale”. The good news is a BVO covers the highest expense in the relocation process, home sale costs. Home selling costs are consistently reported each year as the number one expense during an employee relocation.

In turn, for companies who “tax assist” or “gross-up” employees the home sale gross up is the highest gross up in the employee relocation process. It is of course up to the company whether or not selling costs will be covered and whether or not a company choses to tax assist/gross-up an employee. For those that do, a BVO program will “tax protect” these costs in turn saving the company from having to “tax assist” their employee and essentially eliminates the need to “gross-up”.

On average this saves the company $15,000 or more per home sale (depending on the selling price of the home). As such, eliminating this expense can offer a significant savings to your employee relocation program. However a BVO program is not without its downsides. Below is an overview of the program, how it works, and why ARC is considered one of the top relocation companies in the world at managing a BVO program.

Pros

Removes financial burden to employee for “reimbursement” process
Eliminates front-end tax costs
Eliminates back-end tax costs (“gross-up” and “true-up”)
Stream-lines the home sale process

Cons

Sale must present risk of a “fall thru” and the home could be taken into inventory (increasing costs to the company)

How does it Help?

A Buyer Value Option Program (BVO) gives assistance to employees who are relocating and need to sell their home. 

The Buyer Value Option program requires the employee to find a buyer for their property – the offer from the buyer establishes the value of the home. This “buyer value” is the price the company pays the employee for the property.

The company then sells the property and incurs the associated costs. The costs are tax-deductible for the company.

This beats the alternative of the company paying the costs for the employee, which would then be taxable. Meaning either the company or the employee has to bear the tax.

How Does a Buyer Value Option Program Work?

Here’s how it could work in a typical relocation:

  • Pam is relocating and needs to sell her home before she starts her new role.
  • She has had her house valued at $250,000 and has put it on the market.
  • Pam receives an offer from a potential buyer. This is where the relocation company steps in and buys the house from Pam.
  • The relocation company will then sell the property to the buyer who put in the offer.
  • Then, the relocation company will pay all of the relevant realtor commissions and closing costs for the sale.
  • Once the sale is complete and the costs have been paid, the relocation company will invoice the employer for the realtor commissions and closing costs. For the employer, this is a business expense, so it carries no tax burden.
  • Pam is happy because she’s not had to pay any fees, there’s no stress from selling her property, and her new employer hasn’t had to gross up her expenses to cover tax costs (or leave her out of pocket).

Example Home Owner BVO Policy

thumbnail of ARC_Example Policy-Home Owner-BVO

Reimbursement Programs

As opposed to Buyer Value or “Amended Sale” programs, Direct Reimbursement Programs used to be the most common home sale programs utilized by corporations.  With this program, the employer literally reimburses the employee for the selling costs associated with the sale of the employee’s home.  While this may seem like an easy method for paying the employee back for the costs incurred by the employee for relocation, in reality, the tax liability is much greater for both the employer and employee than with the BVO program.

Here’s why…

The reimbursed amount paid to the employee for relocation costs are actually viewed by the IRS as taxable income to the employee.  In order to level out the tax burden for the employee, it has become common practice for the employer to “tax assist” or “gross-up” the employee for the taxes to help make that employee whole in the transaction.  This can become a never ending cycle, as the IRS also views the gross-up amount as taxable income to the employee. 

In some cases this can throw the employee into a higher tax bracket for the entire year, which means that there are both “front end” and “back end” costs to be considered.

Here’s how the reimbursement scenario might look: 

Direct Reimbursement Program

$500,000

Sales price of the home

$30,000

Real estate commission (6% of sales price)

$10,000

Closing costs (2% of sales price, which can vary by state and county)

$40,000

Total cost to sell the home

-$12,000

Tax with-holdings to the employee (25% Fed Income Tax and 5% State Income Tax. In this example if the company does not “tax assist/gross-up” the employee is left with a net check of $28,000 when reimbursed for the selling costs of $40,000)

$60,000

Cost to the company to get the employee a “net check” for $40,000 (considering the tax with-holdings and subsequent tax assistance/gross-up)

Buyer Value Program Example

In contrast, the BVO Program is structured based on recommendations from Worldwide ERC’s Amended Value (AV) Sale process so that the payment of closing costs may be provided by the employer to the employee without tax consequences to the employee.

Under the BVO, the Third Party Relocation Management Company (RMC) purchases the Employee’s home, and the Brokers’ commissions and closing costs are not charged to the employee.  With BVOs, there are two separate real estate transactions.  First the RMC buys the home from the employee based on the sales price the buyer is willing to pay for the property, and then the RMC sells the home directly to the buyer in a second transaction.  The RMC then pays all of the Broker commissions and closing costs. The RMC then bills the employer, and the cost is considered a “business expense” and avoids the entire tax burden of direct reimbursement. One of the keys to this process is that the two sales transactions cannot be tied to one another.

BVO Program

$500,000

Sales price of the home

$30,000

Real estate commission (6% of sales price)

$10,000
Closing costs (2% of sales price, which can vary by state and county)
$40,000
Total cost to sell the home/Cost to the company
$0
Amount required by IRS to be with-held from the employee for taxes
$0
Cost to the employer for Tax Assistance/Gross-Up
$20,000
Amount saved by company in tax assistance
$12,000
Amount saved by employee in lost taxes

Key Benefits of the BVO

The Buyer Value Option program benefits both the employee and employer during the relocation; the key benefits are:

  • Removes the tax burden to the employee if they are being reimbursed for the cost of the house sale.
  • Ensures the company doesn’t need to gross up the employee’s expenses to cover tax costs. 
  • It reduces any stress for the employee giving them a more positive relocation experience.
  • Streamlines the home sale process and diffuses any initial worries the employee may have about whether they should relocate.
  • On average, this can save $15,000 or more per home sale.

We highlighted the IRS Ruling 2005-7 which includes eleven key elements based around the following transaction requirements:

  • Two arms-length transactions.
  • An element of risk.
  • No “take backs” should a transaction fall thru.

While there needs to be an element of risk, as with any transaction and house sale, there are some considerations to be aware of:

  • The number one risk for the company taking beneficial ownership of a property is the sale falling thru or the price being reduced. The company can acquire considerable costs if the price goes down or they are stuck maintaining an asset prior to finding a buyer. 
  • Property value and pricing – A property being marketed at a price deemed as “too high” which could lead to a longer time on the market and also, the potential for it to fall thru.
  • Fees – in addition to commissions and final sales, there are also other fees to consider:
    • Recording Fees
    • Transfer Taxes
    • Title Expenses
    • Escrow Fees 
    • Repairs
    • Inspections

About ARC

Our job is to ensure you and your employee have a smooth relocation experience. We’re fully knowledgeable on buyer value option intricacies, the amended sale process and all of the risks and rewards. 

ARC is a Buyer Value Option provider to the United States Government under GSA schedule 653-5. In fact ARC provides a Buyer Value Option program to employees relocating with many of the agencies that regulate the relocation industry. As such ARC’s process, technical capabilities and experience have all been vetted and approved by GSA. ARC’s compliance, experience and efficiencies are at the forefront of the relocation industry. In addition to ARC’s technical capability ARC’s customer service has been ranked by both clients and employees at the top end of the entire relocation industry! Please click here to see ARC’s 2019 HRO Baker’s Dozen Ranking and Survey Ratings on Facebook from transferees who used ARC Relocation.

ARC will provide the client with expert advice and counsel to follow the IRS and ERC guidelines and suggestions for Home Sale Programs. Click here to see the IRS revenue ruling on “Amended Sales” and other relocation costs.  The Employee Relocation Counsel (ERC) acts as the governing body for the relocation industry.

ARC’s video does a great job of explaining the BVO / Amended Sale process and all of the risks and rewards. Below is a brief summary of the pros and cons.

For more information about BVO or any other of our services, please contact us.