This year’s DIY Network Blog Cabin 2015 is in Coeur D’Alene, Idaho. According to the DIY Network contest rules, it comes with the home and furnishings ($900,000) and $50,000 in cash for a total prize value of $950,000.
Of course, the $50,000 in cash will come in handy because, if you win the 2015 DIY Network Blog Cabin, 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. That said, don’t underestimate their importance as the recent winner of the 2015 HGTV Smart Home in Austin, Texas is selling house citing high property taxes as the reason.
As they state in the rules: “Real estate transfer taxes, deed recording charges, closing costs , current and future real estate taxes, title insurance, homeowner’s hazard and liability insurance, and all other taxes, costs, fees, and expenses related to the maintenance of the house shall be the responsibility of the Grand Prize Winner commencing as of the date the Grand Prize Winner accepts the Grand Prize.”
Overall, the federal income tax bill alone comes to a whopping $311,786 (see assumptions below) or 32.8 percent of the prize value. If you plan on keeping this home, you had best be prepared to take on a second job or take out a home equity loan to pay Uncle Sam as the $50,000 in cash won’t cover it.
Calculating the state income tax owed is much more complicated since Idaho does have a general individual income tax. As a result, your tax bill will first be determined by Idaho’s individual income tax. Your home state provides a tax credit for income taxes paid to another state so you may owe additional income taxes if your home state levies a higher tax bill. If you think that sounds complicated, just imagine what professional athletes go through paying the "Jock Tax" (income tax) to every state they play in.
Table 1 shows the state individual income tax bill that would be owed to Idaho ($67,735) and any additional taxes owed to your home state (if different). If you live in the nine states that do not have an individual income tax--Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming—then your tax bill is simply the combined bill for Uncle Sam and Idaho ($379,521). Additionally, there are 42 other states whose income tax bills are lower than Idaho’s so you would not owe anything additional.
However, 8 states have bigger income tax bills than Idaho so if you live in one of those states expect to pay more. The worst state to live in is Hawaii with an additional tax bill of $24,535 which brings the combined state and local tax bill to $404,056, or 42.5 percent of the prize value. Following closely behind are Oregon (combined tax bill of $402,640, 42.4 percent of the prize value) and California (combined tax bill of $401,745, 42.3 percent of the prize value).
Oddly, DIY Network does not provide an escape hatch by offering cash in lieu of taking possession of the home unlike the other HGTV contests.
There is no clear cut answer as to whether or not to keep the house or take the house and sell it. You might net more after-taxes if you take the house and sell it yourself, but, of course, you are risking that the appraised value is close to the real market value at the time of sale. Additionally, you may have 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 (Hawaii), a $354,056 ($404,056 minus the $50,000 in cash) home equity loan over 30 years at 4 percent interest would cost you about $1,690 a month. Though this begs the question—have you really won a house or a sizable mortgage?
My suggestion would be to sell the house for whatever you can get for it 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 nearly 20 years experience 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 the American Conservative Union Foundation, Federalism In Action, Tax Foundation, Heritage Foundation, and The Maine Heritage Policy Center.