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Soon after taking office, President Trump ordered a review of all existing regulations with a goal of reducing the regulatory burden by revoking or revising existing regulations. On February 13, 2018, the IRS and Treasury released a list of almost 300 regulations that would be removed, and another 80 that would be revised to reflect those removals. See https://home.treasury.gov/news/press-release/sm0287, and https://s3.amazonaws.com/public-inspection.federalregister.gov/2018-02918.pdf. Since the agencies spent more than a year on this task, it is reasonable to assume that all existing tax regulations were evaluated as part of the process.
Of interest to the mobility industry is that no regulations relevant to mobility are proposed for removal. Of particular importance is that Treas. Reg. 1.7872-1T(c)(1), which for over 30 years has protected qualifying relocation mortgage loans and bridge loans from the below-market interest rules, is not among those targeted for elimination or change.
Under section 7872, loans exceeding $10,000 between employer and employee must carry a market rate of interest. If they do not, the law “imputes” a market rate. The employer is deemed to have given the employee money to pay a market rate, and the employee is deemed to have paid that money back to the employer as interest. The money deemed given by the employer is considered taxable wages, and subject to FICA and FUTA (although no wage withholding is required). The employee may or may not be entitled to an offsetting interest deduction on his or her deemed repayment.
Relocation mortgage and bridge loans frequently carry low or no interest, and would be subject to the rules above. However, section 1.7872-1T(c)(1) carves out exceptions for such loans if they meet certain criteria, the application of which has become standard in the mobility industry.
Changes in the interest deductibility rules since 1984 have called into question the viability of the exemption. In 1984, virtually all interest was deductible. Consequently, it would have made little sense to apply the below-market interest rules to relocation mortgage and bridge loans because an employee itemizing deductions would always have an interest deduction that fully offset the additional income from the imputed interest. The Treasury Department recognized this by requiring that the employee certify that the employee reasonably expects to, and will, itemize deductions.
Subsequent changes to the interest deduction rules, including changes in 1986 and 1987 that limited interest deductions to home acquisition and home equity debt, and in 2017 that eliminated deductibility for home equity debt and further restricted acquisition debt, undermine that basis for the exemption. Typically, employees will no longer be able to take any interest deduction at all for relocation bridge loans. The interest deduction for mortgage loans is limited to $750,000 of debt. Nor is the moving expense deduction under section 217, which is used in the temporary regulation to define the loans that are covered, any longer in effect, at least from 2018 through 2025. Notwithstanding these changes, at present the temporary regulation remains in effect.
As noted, the temporary regulation on relocation loans, 1.7872-5T(c)(1), is not among those proposed to be removed. It is not proposed for removal or amendment. Therefore, it is clear that it may continue to be relied upon by the mobility industry to protect relocation mortgage and bridge loans from the below-market-interest rules.
How this will impact mobility: Relocation mortgage loans and bridge loans will continue to enjoy exemption from the below-market interest rules, and companies will continue to avoid gross-up and payroll issues as a result.