Note: While this contest is over, be sure to check out our latest post on the current contest: Be Prepared for a Large Income Tax Bill if You Win the 2017 HGTV Smart Home in Scottsdale, Arizona
This year’s HGTV 2017 Dream Home is on Saint Simons Island, Georgia. According to the HGTV contest rules, it comes with the home and furnishings ($1,490,706), $250,000 in cash, and a 2017 Honda Pilot Elite ($48,870) for a total prize value of $1,788,576.
Of course, the $250,000 in cash will come in handy because if you win the 2017 HGTV Dream 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: “All costs, taxes, fees, and expenses associated with a prize or the acceptance and use of any element of a prize not specifically addressed above are the sole responsibility of the winner. All federal, state, and local taxes on prize are winner’s responsibility. The Grand Prize Winner will be issued a 1099 tax form for the ARV of the prize.”
Overall, the federal income tax bill alone comes to a whopping $643,170 (see assumptions below) or 36 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 $250,000 in cash won’t cover it.
Calculating the state income tax owed is much more complicated. Georgia does have a general individual income tax. As a result, your tax bill will first be determined by Georgia’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 Georgia ($105,891) 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 Georgia ($749,061). There are 23 other states whose income tax bills are lower than Georgia’s income tax bill so you would not owe anything there as well.
However, 17 states have bigger income tax bills than Georgia so if you live in one of those states expect to pay more. The worst state to live in is California with an additional tax bill of $107,223 which brings the combined state and local tax bill to $856,284, or 47.9 percent of the prize value. Following closely behind are Hawaii (combined tax bill of $827,325, 46.3 percent of the prize value) and Minnesota (combined tax bill of $808,905, 45.2 percent of the prize value).
Fortunately, HGTV does provide an escape hatch by offering cash in lieu of taking possession of the home worth $750,000 and you keep the $250,000 in cash, and the Honda for a total value of $1,047,870. 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 second mortgage 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 $606,284 ($856,284 minus the $250,000 in cash) mortgage over 30 years at 4.5 percent interest would cost you about $3,072 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 icalculator) to make a more precise estimate.
If you decide to keep the house, at least Georgia has a low overall tax burden you can enjoy. As shown in Chart 1, in Fiscal Year (FY) 2013, Georgia had the 9th lowest tax burden in the country at 8.9 percent of personal income—or -13 percent below the national average of 10.3 percent. (Click to Tweet)
Additionally, Chart 2 shows that Georgia’s tax burden has been trending down in the past few years and has dipped below 9 percent—a feat that has not been achieved since the early 1970s.
Also, check out our tax analysis of the recent DIY Network 2016 Blog Cabin, HGTV 2016 Smart Home, HGTV 2016 Dream Home, HGTV 2015 Urban Oasis, DIY Network 2015 Blog Cabin, HGTV 2015 Smart Home, HGTV 2015 Dream Home, HGTV 2014 Urban Oasis, DIY Network 2014 Blog Cabin, HGTV 2014 Dream Home and HGTV 2014 Smart Home.
Tax assumptions: The tax analysis uses a married couple with two children taking the standard deduction and is based on 2017 law.
Scott has nearly 20 years of experience as a public policy economist. He is the author, co-author and editor of over 180 studies and books. His professional experience also includes positions at the American Conservative Union Foundation, Granite Institute, Federalism In Action, Maine Heritage Policy Center, Tax Foundation, and Heritage Foundation.