This year’s HGTV 2015 Smart Home is in Austin, Texas. According to the HGTV contest rules, it comes with the home and furnishings ($1,205,272), $100,000 in cash, and a 2015 Mercedes-Benz C-Class ($58,635) for a total prize value of $1,363,907.
Of course, the $100,000 in cash will come in handy because if you win the 2015 HGTV Smart home, since you will need to be prepared for a hefty federal individual income tax bill and, depending on where you live, a state individual income tax bill—both of which I have estimated in this post.
This analysis excludes the multitude of other taxes such as any real estate, deed or transfer taxes and, most especially, the property tax which you pay year, after year, after year . . . well, you get the picture.
As they state in the rules: “Real estate transfer taxes, deed recording charges and closing costs, if not the obligation of the Developer pursuant to an agreement with Main Sponsor (the “Home Contract”) to acquire the home, shall be the sole responsibility of the Grand Prize Winner, as will all current and future real estate taxes and all other taxes, costs, fees, and expenses related to the maintenance of the house commencing as of the date the Grand Prize Winner accepts the Grand Prize.”
Overall, the federal income tax bill alone comes to a whopping $475,693 (see assumptions below) or 34.9 percent of the prize value. If you plan on keeping this home, best be prepared to take on a second job or take out a home equity loan to pay Uncle Sam as the $100,000 in cash won’t cover it.
Calculating the state income tax owed is simplified in this case because Texas does not levy an individual income tax. As such, your tax bill will be based solely on your current home state—unless you live in these eight other states without an individual income tax in which case you would pay no state income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Washington, and Wyoming
Table 1 shows the state individual income tax bill that would be owed on the prize value. The worst state to live in is California with a state tax bill of $143,442 which brings the combined state and local tax bill to $619,135, or 45.4 percent of the prize value. Following closely behind are Hawaii (combined tax bill of $613,492, 45 percent of the prize value) and Oregon (combined tax bill of $131,831, 44.5 percent of the prize value).
Fortunately, HGTV does provide an escape hatch by offering cash in lieu of taking possession of the home worth $640,000 and you keep the $100,000 in cash and the Mercedes-Benz for a total value of $798,635. Again, as shown in Table 2, the worst states to live in are the same as above.
There is no clear cut answer as to whether or not to keep the house, take the house and sell it, or opt for the cash value. If you look at the last two options, you might net more after-taxes if you take the house and sell it yourself—of course you hope the appraised value is close to the real market value at the time of sale which adds a degree of riskiness. Additionally, you may issues with the Capital Gains tax which will further reduce the attractiveness of the sell-it-yourself option.
However, if you decide to keep the home it is very likely that you will need to take a home equity loan on the house (unless you have a few hundred thousand just lying around) to pay the tax bill. Using the worst case scenario (California), a $519,135 ($619,135 minus the $100,000 in cash) home equity loan over 30 years at 4 percent interest would cost you about $2,478 a month. Though this begs the question—have you really won a house or a sizable mortgage?
My suggestion would be to take the cash option and outright buy a nice home with the cash and have zero debt. And if you have had your fill of paying taxes, you could mimic the Free-Staters and buy a house in the handful of America’s tax havens left (all in New Hampshire) where there are no state and local individual income taxes, no state or local sales taxes and very low (in some case no) local property taxes.
Or, if New Hampshire is not your style, you can check out the tax burdens in other states with our unique tax burden app which shows tax burdens by state, county, by type and over time. If your tax situation is more complicated than what is shown here, you can use this individual income tax calculator (thanks to tax-rates.org) to make a more precise estimate.
Tax assumptions: The tax analysis uses a married couple with two children taking the standard deduction and is based on 2014 law. The winner will be paying taxes based on 2015 law which, especially at the state level, may be different if new tax laws have taken effect. Also, the federal government and most states adjust many elements for inflation which would result in a slightly lower tax bill than reported here.
J. Scott Moody has over 18 years as a public policy economist with a specialty in tax policy and has over 180 publications. He has worked for numerous national and state-based think tanks such as Federalism In Action, Tax Foundation, Heritage Foundation, and The Maine Heritage Policy Center.