The 1-year rule: when corporate housing becomes taxable to your employee

A relocation that looked clean in January can turn into a tax surprise by December. An employee on what everyone called a nine-month assignment gets extended to fifteen, and the housing the company has been providing tax-free is now taxable income to them. Nobody decided that on purpose. It's the IRS temporary-assignment rule doing what it does, and it's the corporate-housing tax issue HR teams trip over most.

I've placed corporate housing in the Bay Area for 12 years. I'm not a CPA, and this isn't tax advice for your situation, but I've watched enough year-end surprises to know the rule is worth understanding before you book a long assignment, not after.

The rule in plain terms

When a company provides or pays for lodging during a temporary work assignment, that benefit is generally excludable from the employee's taxable income. The key word is temporary. The IRS treats an assignment as temporary if it's realistically expected to last one year or less. Once it crosses that line, the assignment is "indefinite," and the lodging stops being an excludable travel benefit and becomes taxable compensation to the employee.

So a 60-day intern placement or a 6-month relocation bridge is clean. A 14-month assignment is not. And the boundary is exactly one year.

The expectation trap

Here's the part that catches people: the test is about what was realistically expected, not just what actually happened.

If at the start you expected the assignment to run longer than a year, the lodging is taxable from day one, even if it ends early. You can't make an indefinite assignment temporary by hoping it'll wrap up fast.

If you genuinely expected it to be a year or less, and it unexpectedly gets extended past a year, the lodging becomes taxable from the point the expectation changed, not retroactively. The day the extension makes it "more likely than not" to exceed a year is the day the benefit flips.

That second scenario is the common one. The nine-month assignment everyone believed in, extended in month seven to "another eight or nine months," just became taxable from month seven forward. If nobody flags it, it surfaces as a payroll problem at year-end.

What "taxable" means for the employee

When the housing flips to taxable, its value gets added to the employee's W-2 wages and is subject to income and payroll tax withholding. On a Bay Area unit running $7,000 to $9,000 a month, that's a large amount of imputed income landing on someone who never saw a dollar of cash.

Which raises the gross-up question. Many companies gross up the benefit, paying the additional tax so the employee is made whole, because an employee blindsided by a five-figure tax bill on housing they were told was a perk is an unhappy, sometimes departing, employee. Gross-up is expensive, and whether your policy covers it should be decided before the assignment, not negotiated after the surprise.

The tax-home piece

The whole framework rests on the employee having a tax home somewhere else that they're temporarily traveling away from. A true permanent relocation, where the employee gives up their old home and moves for good, isn't a temporary assignment at all. There's no "away from home," so the housing isn't an excludable travel benefit in the first place. That's a different tax situation, and one to flag for any move that's permanent rather than a defined-term assignment.

How it interacts with stay length

Most of what I place sits comfortably inside the safe zone. The 30, 60, 90, and 180-day placements on the cost curve are all well under a year and clean from this angle. The rule bites specifically on the long ones: the 12-month-plus assignments, and the medium ones that get extended into that territory. If your program runs a lot of those, this is a standing conversation with your tax team, not a one-off.

What HR should document

The protections are mostly about writing things down and looping in the right people:

Put the expected duration in writing at the start of the assignment. The "realistic expectation" is far easier to defend when it's documented contemporaneously, not reconstructed later.

Revisit the expectation at every extension, and flag the moment one pushes the total past a year. That's the trigger date for the tax treatment to change.

Coordinate with payroll and tax before, not after. The imputed income has to be handled through payroll, and the gross-up decision affects the budget.

Decide your gross-up policy up front and tell the employee what's covered. The surprise is the problem; a known cost is just a cost.

Treat permanent relocations differently from temporary assignments from the start, since the tax logic isn't the same.

What to do

If you place assignments that run anywhere near a year:

• Document the expected duration at kickoff
• Build an extension checkpoint that flags the one-year line
• Loop payroll and tax in before the housing is booked, not at year-end
• Settle the gross-up policy and communicate it
• Get tax counsel on anything that's permanent rather than a fixed-term assignment

None of this is a reason to avoid long assignments; sometimes the business needs them. It's a reason to handle the tax side deliberately so a productive relocation doesn't end with an employee feeling ambushed by their own W-2. The companion piece on who's liable when you house a relo covers the other exposure HR tends to discover too late.

If you're structuring longer Bay Area assignments and want the housing side set up cleanly, request a free consultation. I'll handle the lease and logistics; pair it with your tax team for the treatment.

Sources

• IRS Publication 15-B (Employer's Tax Guide to Fringe Benefits) — Internal Revenue Service
• IRS Publication 463 (Travel, Gift, and Car Expenses) — Internal Revenue Service
• IRS Revenue Ruling 93-86 (Temporary Assignment / 1-Year Rule) — Internal Revenue Service
• IRC Section 162(a) (Trade or Business Expenses) — Cornell Legal Information Institute
• Worldwide ERC Global Mobility Reports — Worldwide ERC
• SHRM — Relocation and Mobility — Society for Human Resource Management