It’s a holiday week and as always, I’m re-running popular blog posts from the past.
This time around, I’m re-posting Part 6 of 6 in a series I did in early 2012 about the tax complications of winning the HGTV “Dream Home” giveaway.
The series was fun but also kind of a train wreck. As I was writing, I kept uncovering more things that I hadn’t considered, like short-term rental issues, covenants, and the specter of Section 469.
Originally published February 8, 2012
This was originally supposed to be a 3-part series, but as new information came up I had to add more parts. This is the final installment, so it ends up as a 6-parter. Same as Star Wars, one short of Harry Potter. Or something like that.
In this wrapup post, I want to explore what I learned.
- The tax code is full of potholes, even for tax pros. When I wrote for first 3 parts, I was thinking the home could be rented as a vacation condo and still be subject to regular rules for rentals. But that’s not the case. The regulations under Section 469 of the tax code say that different rules apply to rentals that have an average rental period of 7 days or less. That would likely limit the tax benefit of renting out the home, as I explore in Part 5. And then there’s another issue….
- Local covenants prohibit short-term rental of the property, so I couldn’t use the Dream Home as a vacation condo anyway. I explore that in Part 4.
- All of this made me conclude that it would be best to take the cash and not mess with even taking possession of the home. Even if you tried to turn around and sell the home right away, you would still have to pay the maintenance and upkeep before the home sold.
What Was the Question Again?
So to conclude this series, here are your options if you win the Dream Home:
Keep the Home: The grand prize is a $2 million home plus $500,000 cash. This means you’ll be taxed on $2.5 million. The tax owed would be $875,000 — meaning the cash prize won’t cover all the taxes. You’ll have to find another $375,000 to cover taxes. And that’s just federal taxes. You might owe state taxes, too.
Take the Home and Cash, Then Sell the Home: Let’s say you sell the home for $2.1 million. You’ll be taxed on $2.6 million ($2 million value of the home plus $500,000 cash plus $100,000 gain from the sale). That’s $910,000 of taxes. Your net takeaway is $1.69 million ($2.1 million from sale plus $500,000 cash prize minus $910,000 taxes). A nice haul. But you still have to pay maintenance and upkeep on the home while it’s for sale.
Now let’s say you sell the home for less than $2 million. Say, for $1.9 million. In that case, you’re still taxed on the $2 million value of the home even though you sold it for less than that. The tax hit is $875,000 and your net takeaway is $1.525 million ($1.9 million from the sale plus $500,000 cash prize minus $875,000).
Take the Cash: You have the option of taking a cash prize of $1.3 million instead of the home. After taxes, you would have $845,000 left. (I think there’s also a vehicle included as well – you would have to pay taxes on the market value of the vehicle, too.)
So that’s a wrap! I had a lot of fun with this series. It took a lot of twists and turns, but it was a fun adventure.