Are Taxes Forcing 2011 HGTV Dream Home Winners to Sell?

Picture of 2011 HGTV Dream Home in Stowe Vermont

Note: To see analysis of the most recent HGTV home giveaways, please visit my new website Key Policy Data.

It was just announced that the winners of the 2011 HGTV Dream Home in Stowe Vermont have put their house up for sale . . . for a cool $3,795,000. However, this clip from the story makes you wonder if property taxes aren’t to blame:

The annual taxes on the home are $27,720, according to town appraiser Tom Vickery.

The town-appraised value of the house is $1,521,000 million; however, that’s based on 2005 selling prices and doesn’t take the furnishings and artwork into account. Vickery is working on a townwide appraisal and expects the home’s value to increase somewhat once the appraisal is completed this summer.

OK, so they are paying $27,720 in property taxes on a $1.5 million valuation. They have the house up for $3.8 million, which means the comps are indicating that the assessed value will “somewhat” increase by at least double! In that case, the property tax bill alone will be a whopping $55,440 per year. And that’s before utilities, maintenance, insurance, etc.

This is why I would advise any winner of these dream homes to take whatever cash you can and run . . . as I mentioned in my previous blog on the 2012 HGTV Dream Home in Midway, Utah.

Income Tax Consequences of Winning HGTV 2012 Dream Home in Midway, Utah

Note: To see analysis of the most recent HGTV home giveaways, please visit my new website Key Policy Data.

Another year and another HGTV Dream Home. This year’s HGTV 2012 Dream Home is a river-front home in Midway, Utah. According to the HGTV contest rules, it comes with a home and furnishings (valued at $1,500,000), cash ($500,000) and a 2012 GMC Terrain SLT2 ($38,755, shown above) for a grand package valued at a cool $2,038,755.

If you win the dream home, be prepared for a hefty federal and state income tax bill (this analysis excludes the myriad of other taxes such as any deed or transfer taxes and, most especially, the property tax which you pay year, after year, after year . . . well, you get the picture). Overall, the federal and state income tax bill comes to a whopping $775,586. Even after using the $500,000 in cash, you will still be left with a tax bill of $275,586 . . . maybe the IRS will let you pay on an installment plan?

Fortunately, HGTV does provide an escape hatch by offering $800,000 in lieu of taking possession of the home, plus the $500,000 in cash and vehicle–for a grand total of $1,338,755. If the winner opts for this choice, they will take home $843,169 free-and-clear after paying income taxes of $495,169.

My suggestion would be take this money and run. One could outright buy a very, very nice home with the cash. For example, check out this home in beautiful Hale’s Location, New Hampshire listed for $729,000 and still have enough left over to put into your IRA. Hale’s Location is one of a handful of America’s tax havens left (all in New Hampshire) where there are no state and local income or sales taxes and very low (in some case no) property taxes. In fact, according to the listing, the property taxes are a mere $1,887 per year.

Taxes Matter 13: Maine’s Sales Tax, Tax Zappers and the Laffer Curve, Oh My!

Old Cash Register 2
Creative Commons License photo credit: OhMyGouda in Florida

I just posted this on The Maine Heritage Policy Center’s blog (Maine Freedom Forum), but I also wanted to share this with Wealth Alchemy’s audience because so many of you will likely be seeing this debate coming soon to your own state.

Also, we all need to realize that the retail sales tax is one of the worst taxes out there and is simply on its last legs–all states should be working to eliminate it. The better alternative would be to enact a Business Enterprise Tax as New Hampshire has done which is also one reason why New Hampshire has one of the lowest business tax burdens in the country. Read on . . .

Today the Kennebec Journal has a story about the rise of sales tax zapper computer programs that enable businesses to under-report their taxable sales and lower their sales tax bill. Of course, the article casts Maine’s state government as the victim of unscrupulous business owners:

But some lawmakers are concerned the state may be losing significant revenue from the latest computer technology, called “zappers” because they alter sales records in a more subtle way that still yields a lot of cash for the seller.

“It’s clearly subversive and against our process of treating people fairly, equitably and everyone paying their fair share of the tax burden,” said Rep. Garry Knight, R-Livermore Falls, co-chairman of the Legislature’s Taxation Committee. “I would suggest that zappers be outlawed in this state.”

He said his panel has not looked at the expanding use of technology to cheat on tax laws, but he said if it is happening in other states, Maine should assume some is happening here.

With a zapper program, a $6 burger-and-fries combo at a restaurant, for example, could be altered by the software to reflect a $4 burger sale. In Maine, that would mean 14 cents going to the restaurant owner that should be paid in taxes. In other states, that has added up to a lot of lost revenue.

A retailer can have the program change the sales price of an item. For example, a $20 shirt is reported as selling for $18. In Maine, that’s a loss of a dime; but all of those nickels, dimes and pennies add up.

A retailer can have the program change the sales price of an item. For example, a $20 shirt is reported as selling for $18. In Maine, that’s a loss of a dime; but all of those nickels, dimes and pennies add up.

“Tax evasion is something that we always should take seriously,” said Rep. Seth Berry, D-Bowdoinham, the lead Democrat on the Taxation Committee. “Zappers are something that Maine Revenue Services is not able to track. It is a very difficult enforcement problem.”

He said Maine should watch what other states are doing and consider adopting policies and laws that seem to work the best. He agreed Maine may want to outlaw the computer programs, although he is not sure how effective that may be.

As usual, policymakers are simply treating this as a tax compliance issue when, in reality, this zapper issue is a symptom of a much larger problem–Maine’s sales tax is suffocating the state’s retailers. A few month’s ago I released a study which showed that Maine is annually losing an estimated $2.2 billion in retail sales to New Hampshire thanks to tax-fueled cross-border shopping by Mainers. Lowering the sales tax would encourage more Mainers to stay home to do their shopping. As a result, Maine’s retailers would not be struggling quite as much as they are now and having to resort to desperate measures such as sales tax avoidance.

In fact, the analysis suggests that Maine sales rate of 5 percent is very likely on the back-side of the Laffer curve. In other words, a lower sales tax rate would generate more economic growth and higher tax collections from other taxes, such as income taxes, the remaining sales tax, property taxes, etc., that it would offset the lower sales tax collections stemming from the tax rate reduction. It’s the closest thing to a “free lunch” that one can get in tax policy. Yet, policymakers have just left the sandwich on the table.

No, the real victims here are Maine’s businesses who have historically been treated by policymakers as a “money pinata.” Now, on top of the sorry economy, Maine businesses, especially smaller businesses, will have to live in fear that the next knock on their door will be an agent from the Maine Revenue Service as they attempt to crack down on these sales tax zappers. This will be an added tax compliance cost for all businesses which is especially onerous and demeaning to the overwhelming majority who play-by-the-rules.

Income Tax Consequences of HGTV Urban Oasis Home

Trump Tower in Chicago
Creative Commons License photo credit: John Picken

As promised, this post follows-up on “The diy Network’s Blog Cabin Giveaway and Tax Nightmare” post from a few days ago. However, I’ve changed the approach to the tax calculation to focus just on the income tax ramifications for two reasons:

  1. The income tax simply dominates the overall tax consequences of winning the prize. Trying to determine the transfer taxes and other applicable taxes is simply not worth the effort as it is nothing more than a rounding error when compared to the income tax.
  2. The HGTV Urban Oasis Home is offering the winner the choice of the home or $675,000 in cash so I really want to focus on that trade-off.

Overall, the HGTV Urban Oasis Home is valued at $785,000 and would result in an income tax bill to Uncle Sam of $235,382 (assuming a family of four) and to the State of Illinois of $38,850–HGTV should have held this contest last year before the new 5 percent income tax rate kicked-in which would have saved the winner $15,540. As such, the total income tax bill comes to $274,232 or 35 percent of the homes value. And like the Blog Cabin Giveaway, HGTV is not offering any cash to help offset this tax bill.

Fortunately, HGTV does provide an escape hatch by offering $675,000 in lieu of taking possession of the home. If the winner opts for this choice, they will take home $444,769  free-and-clear and you won’t have to live in one of the highest cost-of-living areas in the country–thanks, in part, to a shockingly high sales tax of 9.75 percent!

My suggestion would be take this money and run. One could outright buy a very, very nice home with the cash. For example, check out this home in beautiful Hale’s Location, New Hampshire listed for $459,900. Hale’s Location is one of a handful of America’s tax havens left (all in New Hampshire) where there are no state and local income or sales taxes and very low (in some case no) property taxes.

The diy Network’s Blog Cabin Giveaway and Tax Nightmare

Note: To see analysis of the most recent HGTV home giveaways, please visit my new website Key Policy Data.

Starting August 15, 2011, folks across the country began entering the diy Network’s Blog Cabin Giveaway that will award a lucky winner with a renovated, waterfront 1905 farmhouse on 16 acres on the Chesapeake Bay in Virginia. While this might be your dream home, beware because it also comes with a tax nightmare.

Overall, the house is valued at $650,000 with another $100,000 of home furnishings–for a total value of $750,000. The folks at the Internal Revenue Service view this as taxable income. As such, your total tax bill this year (assuming a family of four and no other income) would be $283,705–or 37 percent of the value of the prize. The taxes break down as follows:

  1. Federal income taxes = $231,882
  2. Virginia income taxes = $43,746
  3. Property transfer taxes (deed, trust, grantor) = $5,175
  4. Annual property taxes = approximately $2,903

The property taxes are estimated because we don’t know exactly what town the house is located in–only that it is in Mathews county. So, the estimate is based on county-wide property tax burdens provided by the Tax Foundation. And, of course, unlike the other taxes the property taxes are a perpetual expense.

Unlike the recent HGTV 2011 Dream Home in Stowe, Vermont, this giveaway does not include any cash to help cover the cost of taxes which is a major disservice to the winner. That means the winner must come up with over a quarter of a million dollars in a hurry. Though perhaps one could take out a home equity loan, assuming you’ve got the income to cover it.

However, I’m still left with one question: since they are giving you $100,000 in home furnishings, will the winner also be liable to pay Virginia’s use tax (which is the sales tax paid on items brought into the state, such as a catalog purchase) of 5 percent? Does anyone out there know the answer? If yes, then add another $5,000 to the tax bill.

To the lucky winner . . . enjoy your tax nightmare 🙂

Update: Tax analysis of HGTV’s Urban Oasis Giveaway.