This year’s diy Network’s Blog Cabin is located in Winter Haven, Florida. According to the diy contest rules, it comes with the home and furnishings, $50,000 in cash, and a 2015 Mastercraft NXT 20 Boat for a total value of $891,000.
Of course, the $50,000 in cash will come in handy because if you win the blog home, be prepared for a hefty federal individual income tax bill and, depending on where you live, a state individual income tax bill 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, title insurance, homeowner's hazard and liability insurance shall be the sole responsibility of the Grand Prize Winner, as will all future real estate taxes and other expenses related to the maintenance of the house.”
Overall, the federal income tax bill alone comes to a whopping $315,211 (see assumptions below) or 35.4 percent of the value of the home. 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 $50,000 in cash won’t cover it.
Calculating the state income tax owed is generally more complicated, but made easier due to the fact that Florida does not have a general individual income tax. As a result, your tax bill will be determined in your home state. Unless you are fortunate enough to live in Florida or one of the other 8 states that do not levy a state income tax (Alaska, , Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming), then you will have a state individual income tax bill that is significantly greater than 0.
Table 1 shows the state individual income tax bill that would be owed if you live in the other 42 states. The worst state to live in is be Hawaii with a tax bill of $85,780 which brings the combined state and local tax bill to $400,991, or 45 percent of the value of the home. Following closely behind are Oregon (combined tax bill of $400,250, 44.9 percent of the value of the home) and California (combined tax bill of $398,868, 44.8 percent of the value of the home).
Besides the 9 states without an individual income tax, the next 3 best states to live in are Pennsylvania (combined tax bill of $342,565, or 38.4 percent of the value of the home), Indiana (combined tax bill of $345,335, or 38.8 percent of the value of the home), and North Dakota (combined tax bill $345,855, or 38.8 percent of the value of the home).
Interestingly, unlike other contests, diy Network does not provide an escape hatch by offering cash in lieu of taking possession of the home.
These numbers kind of makes you wonder who the real winner of this contest is--the contestant or the government? My suggestion would be to sell the home and outright buy a nice home with the cash and have zero debt.
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 lying around). Using the worst case scenario (Hawaii), a $350,991 ($400,991 – the $50,000 in cash) home equity loan over 30 years at 4 percent interest would cost you $1,676 a month. Though this begs the question—have you really won a house or a sizable mortgage?
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, by type and over time. If your tax situation is more complicated than what is show here, you can use our featured 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 2013 law. The winner will be paying taxes based on 2014 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.