NOVEMBER 2016

MOBILITYINSIGHTS

Information from Cartus on Relocation and International Assignment Trends and Practices

Two Deed or Not Two Deed

Relocation programs are commonly structured to take full advantage of tax laws affecting the purchase and sale of employee homes. At the federal level, the IRS validated tax protection for an amended value program utilizing a deed-in-blank in Revenue Ruling 2005-74. As welcome as the ruling was, it suddenly brought state tax issues to the forefront because, regardless of any federal tax rulings permitting use of a single deed, some states require two deeds.

This Mobility Insights outlines the key issues that grow out of real estate practices that can vary widely from state to state. It also presents the Cartus “Blended Option,” which allows clients to capture available cost savings by using a single deed in certain states while still taking prudent steps to manage legal and tax risk by using two deeds in others.

Cartus’ blended option The State Tax Issue in Perspective addresses the decision of whether to use one When the IRS issued its 2005 ruling stating that in a typical relocation real estate transaction the deed or two, considers use of a deed-in-blank was acceptable from a federal tax perspective, it became immediately clear tax issues as well that companies could save considerably by adopting a one-deed program wherever feasible. The as offering clients a savings vary widely. In some states, the added expense amounts to a relatively few hundred dollars balance between risk in deed preparation and recording fees; in others, it can amount to thousands of dollars when and cost. transfer taxes are taken into account. In fact, individual states treat the transfer of real estate in various ways, some invoking transfer taxes and others adding reporting and withholding provisions that add administrative burdens. Taking all of these issues together, the decision whether to use one deed or two requires a close study of state tax issues.

Understanding that the clarity of the IRS’s ruling merely raised the prominence of a complex state- by-state decision process, ERC’s Master Source includes a document, “Blank Deed: State Issues, and Use After Rev. Rul. 2005-74,” listing the state issues that would need to be considered in order to determine when to use one or two deeds. This communication does not itself contain specific state-by-state recommendations.

To solve the problem of how to treat the variety of state practices and to accommodate inevitable future changes, Cartus recommends the Blended Option reflecting what we believe most clients would consider the best balance of cost and risk.

The clear advantage is that clients are not required to examine the choices individually by state in order to institute a new practice that reduces overall program costs. If they wish, however, clients may choose a more conservative approach by communicating their preference for an across-the- board two-deed protocol.

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In selecting the Blended Option, clients invoke a minor degree of administrative risk that might arise if the local officials executing the tasks involved in these transactions or a buyer’s attorney raised objections founded on an incomplete understanding of these issues. In such an event, defaulting to the use of two deeds is always an available option, one whose cost is insignificant compared to the savings that can be realized by using a single deed in the majority of cases.

A New Choice While defaulting to a two-deed approach is Conceptually, the Blended Option calls for the use of one deed in all states that do not have special always an option, and requirements (explained later in this Tax & Legal Brief) where legal, rather than cost, issues make it supports tax protection advisable to use two deeds. These special states are: most strongly, using • Washington, New Hampshire, New York, and Pennsylvania (where two transfer taxes are levied two deeds does not even if only one deed is used); completely eliminate • Delaware, District of Columbia, Hawaii, Illinois, Indiana, Nevada and Rhode Island (states with risk. False Claim and Qui Tam statutes); • Kentucky (where using one deed exposes the company to possible penalties); • Texas (where both the deed and the loan documents must be dated on the same day); and Puerto Rico (where penalties to deed must execute on same day); and • Oklahoma (where a negotiated settlement requires that two deeds be used).

The actual list of states in each category is provided below.

Blended Option

One-Deed States (37): Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Florida, Georgia, Idaho, Iowa, Kansas, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, New Jersey, New Mexico, North Carolina, North Dakota, Ohio, Oregon, South Carolina, South Dakota, Tennessee, Utah, Vermont, Virginia, West Virginia, Wisconsin, and Wyoming (*plus Guam)

Two-Deed States (13): Delaware, Hawaii, Illinois, Indiana, Kentucky, Nevada, New Hampshire, New York, Oklahoma, Pennsylvania, Rhode Island, Texas, and Washington (*plus the District of Columbia and Puerto Rico)

The Case for Two Deeds

If tax and legal protection is paramount, the use of two deeds in all states supports the case for tax insulation most strongly. On the other hand, using two deeds does not in and of itself eliminate risk for the following reasons:

1. The client’s program must align closely with the description outlined in Revenue Ruling 2005-74 in order to gain the benefit even of a two-deed mechanism (in other words, using two deeds does not cure an otherwise flawed program); and

2. IRS agents must, in practice, interpret the client’s program on audit in a way that is consistent with the ruling (which cannot be guaranteed).

One/Two Deed Issues to Consider

The greatest source of savings comes in the ability to avoid a second closing, and the largest factor contributing to those savings is the presence of a transfer tax in a number of states. Nevertheless, savings are available in states both with and without a transfer tax. We will first set out the transfer tax issue, since it is the key cost variable, and then explain any other tax and legal factors that influence the actual state-by-state choice. It is important to note that this information is intended as a reference for clients and their tax advisors, and is not meant as tax advice from Cartus. PAGE 2 OF 5 NOVEMBER 2016

MOBILITYINSIGHTS

1. Transfer Tax Issues.

States With a Transfer Tax. (AL, AR, AZ, CA, CO, CT, DE, FL, GA, HI, IL, IA, KY, ME, MD, MA, MI, MN, NE, NV, NH, NJ, NY, NC, OH, OK, OR, PA, RI, SC, SD, TN, VT, VA, WA, WV, WI = 37, plus DC) In these states, a transfer tax is imposed on the conveyance of property. The transfer tax varies by state—and sometimes even within a state—and ranges from 0.5% to 5%. If two deeds are employed, this tax must be paid twice. Therefore, in most states with a transfer tax, the savings by moving to one deed would be substantial. The presence of a transfer tax is thus the primary inducement to adopt a single-deed program in that state but is not the sole determinant; other title transfer costs and issues should be considered.

In New York, Washington, and Pennsylvania, the state imposes a transfer tax not on the recorded conveyance of the property but on the transaction itself. Thus, these states tax the transfer of the property from the employee to the employer/relocation management and from the employer/ relocation management company to the ultimate marketplace buyer, whether the parties use one deed or two. In these states, it has become accepted practice to use two deeds because the additional fees in taking title a second time (recording fees, etc.) are so minor in comparison to the transfer tax, which must in any event be paid. The advantage in these states is that, for a small cost, using two deeds reinforces the concept of two separate and distinct transactions, which goes to the heart of the issue in the IRS’s 2005 ruling. Technically, Maryland practice is determined at the county level and is neither uniform nor predictable. In most cases, a second transfer tax is not collected. New Hampshire is a special case in which the law requiring payment of two transfer taxes is not generally enforced.

States Without a Transfer Tax. (AK, ID, IN, KS, LA, MS, MO, MT, NM, ND, TX, UT, WY = 13, plus GU and PR)

In these states with no transfer tax, the savings in a one-deed program are likely the costs of deed preparation and recording, which, although relatively small, do constitute available savings.

In Connecticut, there is no transfer tax on the second sale if it takes place within six months of the first sale. This special provision was passed by the state legislature at Cartus’ urging on behalf of the relocation industry. Although it is possible that an inventory home might close more than six months after it is acquired from the employee, this event would only necessitate the payment of the second transfer tax, not the added cost of a second closing.

2. Tax and Legal Issues

Beyond the issues of a transfer tax are a number of issues that might bear on the choice of a one- deed or two-deed program in those states:

Withholding. (AL, CA, CO, DE, GA, HI, ME, MD, MS, NJ, NY, OR, RI, SC, VT, WV & PR)

Various states have imposed withholding requirements on nonresidents in order to ensure the ability to collect taxes. An employee moving out of state under a one-deed regimen is no longer a resident when the second sale closes and the deed is recorded, and may therefore be considered subject to withholding. Actually, the sale does not involve the employee, since a bona-fide sale from the employee to Cartus has already taken place, using a deed-in-blank, as allowed by the IRS. Any withholding would therefore impact Cartus as the seller. In reality, the issue should be irrelevant in most transactions, since the withholding applies to nonresidents, whereas Cartus, as an entity licensed to do business in all 50 states, is treated as a resident. Cartus’ role averts an issue that would otherwise arise in Maine, Mississippi, and Vermont, three states where there is no exemption allowed to sellers selling their principal residences.

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From time to time, questions may arise from closing agents not fully versed in these issues, but they can generally be resolved quickly and are certainly not significant enough to warrant the automatic use of two deeds in withholding states. At most, this issue may occasionally necessitate the use of two deeds on a particular file.

Notary Statutes. (AK, AZ, CA, FL, MI, MN, NM) Seven states have statutes that prohibit notaries from certifying signatures on an incomplete document. Because a deed-in-blank omits the name of the grantee (buyer), notaries may, in theory, resist completing this needed task, although the argument can be made that a deed signed by the seller is as complete and negotiable as a blank check. This problem is relatively rare in actual practice and is difficult to consider as a serious deterrent to using one deed, even if finding an alternate notary or other party to complete the deed is required.

Qui Tam. (DE, DC, HI, IL, IN, NV, RI) In 2000, several relocation management companies were involved in a Florida “qui tam” litigation alleging that a deed-in-blank evades a transfer tax payment that is properly due the state. A qui tam suit allows a private citizen to bring a cause of action to collect taxes on behalf of the state itself. The case was ultimately dismissed, but there are other states with laws similar to Florida’s that allow a private right of action to enforce state tax laws where a similar issue could arise. Only Delaware and Nevada have qui tam statutes that relate to taxes, however.

Licensable Activities. (OK) In a negotiated settlement between the relocation industry and the state of Oklahoma, it was agreed that relocation transactions would use two deeds in order to avoid any issues concerning engaging in brokerage activities in the state without a broker’s license.

Consideration. (KY) In Kentucky, the actual consideration being paid must be recited on the deed; thus, two deeds may be required to avoid discrepancies in those frequent cases where the amount paid to the employee differs from the amount paid by the ultimate buyer. Failing to comply with this law can carry criminal penalties.

Dating of Documents. (TX, PR) In Texas, a lender requirement that the deed and security interest be dated the same day makes the use of two deeds the norm, and in Puerto Rico the notary law requires that the parties to a deed execute on the same day.

An Additional Consideration

The implications of a transfer tax are different depending on whether the buyer or the seller pays the tax. In states where payment of the tax is legally, or even customarily, paid by the buyer, using two deeds adds the minor expense of recording the first deed and tax-protects the payment (i.e., the cost is not imputable as income to the employee because it is not customarily paid by a seller). If, by contrast, the transfer tax is a seller’s cost in that state and is paid by the employer, it must be reported as income to the employee and may then be grossed up in order to tax-protect the employee (in keeping with Revenue Ruling 72-339, which excludes the broker’s commission and closing costs in the purchase of the employee’s home from being imputed as taxable income to the employee, except for costs customarily paid by a seller in such transactions).

In Alaska, Maine, Pennsylvania, and Virginia, law or custom calls for the buyer and seller to split various closing costs, including transfer taxes. The issue is therefore only one of extent in determining the seller-paid closing costs that should be attributed as income to the employee when paid by the company; it does not directly affect the decision whether to use one deed or two. Once again, the consideration is the cost of reporting, withholding, and gross-up.

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Striking a Balance

With clarity in place at the federal tax level, there are more variables to consider in choosing between one deed and two, but a consensus Blended Option, using two deeds in 13 states and one deed in 37 states, is available. The final determination whether and where to use one or two deeds is ultimately each client’s, however, in consultation with its own tax and legal authorities. For some clients, electing to use two deeds may reflect a highly risk-averse philosophy.

This practice may be advisable if some provisions of their program, like a failure to adhere to the 11 Each client should make Key Elements underlying a compliant Amended Sale program, make a skeptical review by the IRS their own decision more likely. At the same time, clients can minimize homesale costs (see example below), while still between one or two making prudent tax and legal choices in the design of their relocation program with minimal risk of deeds, in consultation legal or administrative complications. with their own tax and legal counsel. Note—­Cartus’ account management staff and legal team remain available to discuss these issues with you and your tax and legal advisors.

Example of Cost Savings (Michigan)

Two Deed One Deed Transfer Taxes $5,160 Transfer Taxes $2,580 Recording Fees $ 21 Recording Fees $ 0 Legal Fees $ 100 Legal Fees $ 50 Total $5,281 Total $2,630

Savings = $2,651 (0.88% of an average $300,000 home)

Please note: in presenting this interpretation, Cartus is not intending to provide tax advice. Clients should consult their own tax and legal advisors for advice on tax matters.

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© 2016 Cartus Corporation. All rights reserved. Cartus and the Cartus logo are registered trademarks of Cartus Corporation. The information in this Mobility Insights publication is provided in good faith, however Cartus accepts no liability for the data and information included within and the document is not intended to provide specific advice or to take the place of either written law or regulations. PAGE 5 OF 5