Quick Answer
Yes, you do have to pay taxes if you win the HGTV Dream Home. The value of the home is considered income by the IRS, so you will owe income tax on the full retail value of the home even though you didn’t actually pay anything for it. You’ll also owe property taxes to your local jurisdiction.
Do you have to pay income tax if you win the HGTV Dream Home?
Yes, winning the HGTV Dream Home is considered income by the IRS. Even though you won the home and didn’t actually pay anything for it, you are still responsible for paying income tax on the full retail value of the home.
The taxable value is the appraised value of the home, land, and any additional prizes included in the grand prize package. For the 2023 HGTV Dream Home located in Warren, VT, the total retail value is approximately $2.8 million. That means the winner will owe federal and state income taxes on $2.8 million of income even though they didn’t pay anything to win the home.
According to the IRS, prizes and awards are taxable income. All winnings, whether it’s cash, a car, a vacation, or a house have a fair market value, and that value is considered taxable income.
The income tax rate you pay will depend on your total taxable income for the year you win the home. The top federal tax rate is currently 37%, and state income tax rates vary widely across the country. Even if you win the HGTV home, you likely won’t pay the top rate on the entire value unless your other income is already very high.
Some key points about paying income tax on the HGTV Dream Home:
– You are responsible for the income taxes in the year you take possession of the home. This is true even if you choose to sell the home instead of move in.
– Income taxes are owed on the full retail value, not the amount of equity you have in the home.
– Taxable value includes the home, land, furnishings, and any other prizes.
– The sponsor will provide a 1099 form detailing the value for tax reporting.
– You can’t avoid income tax by refusing the prize. The IRS will still consider it taxable income if you reject the home.
– Income taxes can be deferred if you choose to sell the house, but capital gains taxes will then apply.
So while winning the home is an amazing prize, the winner should be prepared for the income tax implications and have a plan to pay the taxes. Otherwise, you could end up in trouble with the IRS!
Do you have to pay property taxes if you win the HGTV Dream Home?
Yes, you are responsible for paying annual property taxes if you win the HGTV Dream Home. Property taxes are owed to your local jurisdiction based on the value of the home and land.
Property taxes help fund public schools, police, infrastructure, and other public services in your community. They are separate from federal and state income taxes.
Even though you won the home for free, you must pay property taxes on it like any other homeowner. This annual tax must be budgeted for as long as you own the home.
The amount you pay depends on:
– The appraised value of the home and land. Higher value means higher taxes.
– The property tax rate in the home’s location. This varies by state and county. Rates are generally 1-3% of the home value.
– Any homestead exemptions or tax breaks available. Some areas offer reductions to primary residents.
For the 2023 HGTV Dream Home located in Warren, Vermont, estimated annual property taxes are about $18,000. This is based on the home’s $2.8 million value and an average 1.5% tax rate. The winner should be prepared to pay this amount each year.
Some key points on property taxes for the HGTV Dream Home:
– Property taxes are owed as soon as you take ownership and are due annually.
– You can’t avoid property taxes by selling the home. They’re due as long as you own it.
– Taxes can be paid from escrow by your mortgage lender if you get a mortgage.
– If you sell quickly, your ownership time will determine taxes due.
– Property taxes stay with the home and transfer to the new owner if you sell.
– Renting the home out requires paying commercial property tax rates.
The winner will need to budget for property taxes just like any other homeowner. This is an ongoing expense to factor in if you plan to keep the HGTV Dream Home.
Can you get out of paying taxes on the HGTV Dream Home?
There is no way for the winner to avoid paying taxes on the HGTV Dream Home prize. Although the home is won rather than purchased, the full retail value is considered taxable income by the IRS and property taxes are levied by local government.
Some things that will not exempt you from taxes:
– Turning down the prize – The fair market value is still considered income if you reject the home.
– Selling the home right away – Income taxes apply and you may owe capital gains too.
– Paying off the mortgage – Taxes are based on the home’s value, not how much you paid.
– Renting the home out – You may qualify for some investment-related deductions but not avoid taxes.
– Donating the house – You will still owe income tax and the donation is not fully deductible.
– Transferring to a trust or LLC – This protects your personal assets but does not impact taxes owed.
– Gifting the house – The gift still has a taxable value assigned by the IRS.
– Using it as a vacation home – Income and property taxes apply to all residences.
The IRS wants its share of such a valuable prize. The only way to avoid tax on the HGTV Dream Home would be to refuse the prize completely before taking ownership.
Of course, given the home’s multi-million dollar value, paying tax may be well worth getting to own and live in the home or sell it for a profit later. But the winner should absolutely plan for both income and property taxes owed each year.
How are taxes calculated if you sell the HGTV Dream Home right away?
If the winner chooses to sell the HGTV Dream Home right away instead of moving in, they will owe income taxes and potentially capital gains taxes depending on the sale price and their tax basis.
Here is how taxes are calculated if the home is sold immediately:
– Income tax is owed on the full retail value of the home when won, even if sold right away. The IRS still considers this income.
– The initial tax basis is the retail value upon winning the home.
– If sold for more than the retail value, capital gains tax applies on the difference. The gain is taxed at either 15% or 20% depending on income.
– If sold for less than the retail value, you can claim a capital loss deduction. This offsets capital gains from other sources.
– Depreciation recapture may apply on part of the home value if it was claimed previously. This is taxed at 25%.
– You can defer income tax through an IRS 1031 exchange by buying another like-kind property. But capital gains from a sale cannot be deferred.
– State income and capital gains taxes also apply based on that state’s rates.
Let’s look at an example:
Retail value when won: $2,800,000
Sold for: $3,000,000
– Income tax owed on $2,800,000 retail value
– Long term capital gains tax owed on $200,000 gain ($3,000,000 – $2,800,000)
In this scenario, the winner owes both income tax and capital gains tax for selling at a profit right away. Working with a tax professional can help properly calculate and plan for taxes when selling immediately.
Can you get a mortgage for the HGTV Dream Home?
Yes, the winner can opt to take out a mortgage on the HGTV Dream Home instead of paying for it in cash. This allows them to leverage the home’s equity and avoid liquidating assets to pay the taxes.
There are a few options for getting a mortgage:
– **Traditional mortgage** – A standard home loan could be obtained from any lender based on credit, income, and the appraised value of the home. Rates may be higher because it is a second residence.
– **Sponsor mortgage** – HGTV offers financing through their sponsor Pulte Homes. Details vary by year but often have no down payment and lower rates.
– **Cash-out refinance** – Once taking ownership, the winner could do a cash-out refinance to tap home equity for paying income taxes.
– **USDA loan** – In some years the home is located in a rural area that qualifies for a $0 down USDA guaranteed loan.
– **Construction loan** – If further customizations are planned, a construction loan allows you to draw funds as needed.
– **ARM or balloon mortgage** – These may offer lower initial payments but have risks when they reset/mature.
A mortgage can help alleviate the tax burden since the winner has to pay tax on the full value whether they use cash or financing. And mortgage interest, property taxes, and possibly points can also be deducted on their tax return subject to IRS rules.
But it’s important to budget properly to be sure they can afford the mortgage payments and out-of-pocket ownership costs in the future. Working with a tax professional and mortgage lender can help navigate the options.
Can you sell part of the HGTV Dream Home to pay the taxes?
It may be possible for the winner to sell a portion of the HGTV Dream Home or land to generate cash to pay the income taxes and ongoing property taxes. However, this strategy has limitations and risks.
Reasons the winner may consider selling part of the home:
– Income taxes are high based on the full $2M+ value
– They wish to keep the home but lack sufficient liquid funds to pay taxes
– Expenses like property taxes and insurance are beyond their budget
– They only wish to keep certain parts of the home like the main house or guest cottage
Some potential issues with partial sale include:
– The home is designed as a single property. Subdividing may compromise land use.
– Zoning restrictions may not allow dividing the land or adding new dwellings.
– Parcels must be appealing to potential buyers and have access.
– It can be a lengthy process dealing with surveys, title transfers, approvals.
– No guarantee the sales proceeds will equal the desired amount.
– Capital gains tax will apply on any profits from sale.
– Remaining home value and taxes may still be unaffordable.
Overall, selling off a portion of the home involves substantial risk, uncertainty and costs compared to selling the whole property. Consult professionals to see if it can work in your specific situation before moving forward.
Can you give the HGTV Dream Home to a friend or family member?
It is possible to gift the HGTV Dream Home to a friend or family member after winning it, but the tax implications are complex. The gift will still be subject to income tax based on the full retail value.
Here is how gifting the home works:
– You must first take official ownership as the winner for gifting to be possible.
– Income tax is still owed by you as the winner on the full retail value.
– The gift value to the recipient is also considered taxable income by the IRS.
– Taxable gift value is reduced by exclusions and deductions but often still substantial.
– The gift recipient owes income tax on the value exceeding the annual exclusion amount ($16,000 for 2022).
– Lower capital gains rates may apply when the recipient eventually sells.
– You may owe gift tax in addition to income tax if the total gifts for the year exceed $16,000.
As you can see, substantial taxes can still apply when gifting the home. Working with a tax professional is key to minimize taxes for both you and the recipient.
It may be better to have the recipient be a co-winner with you from the start when first entering the contest. This avoids the complications of gifting entirely. Overall, gifting the HGTV Dream Home has major tax implications that need to be carefully considered.
How does winning the HGTV Dream Home affect your tax filing status?
Winning the HGTV Dream Home can impact which tax filing status you qualify to use. This is important since different filing statuses have different income tax rates and standard deductions.
Some key points on how winning may affect tax status:
– If single, head of household status may apply if you maintain a home for dependents.
– If married, you must file jointly to exclude the home’s value from spouse’s income.
– If married filing separately, you each must report half the home value as income.
– If self-employed, you may qualify for advantageous home office deduction rules.
– Owning a second home can disqualify you from head of household status.
– Overall income and residency tests still apply to claiming certain statuses.
– State filing status is also impacted, such as for property tax deductions.
Consult a tax professional to select the most advantageous filing status before submitting your return after winning the home. Your marital status, dependents, other homes owned and income sources are all factors to consider.
Proper tax planning and status selection can potentially save thousands in taxes each year. It’s an important part of financial planning around winning this valuable prize.
Conclusion
Winning the HGTV Dream Home is certainly an amazing, life-changing prize. But the substantial income and property taxes that come with the home cannot be ignored. Proper tax planning and budgeting is essential to truly enjoy the windfall while ensuring you can comfortably afford the ongoing costs. Working with tax professionals and financial advisors can help navigate the complex tax implications while creating a smart financial plan. With the right preparation, you’ll be in good shape to handle the taxes and make the most of your incredible new dream home!