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:
- 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.
- 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.