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Why don’t the people on Extreme Makeover have to pay gift tax or capital gain tax on their new home?
March 8, 2010 | In: New Home Gifts
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3 Responses to Why don’t the people on Extreme Makeover have to pay gift tax or capital gain tax on their new home?
Jesse H
March 8th, 2010 at 2:02 pm
Gift tax is paid by the giver, capital gains is paid when they sell the home.
Slow Joe
March 8th, 2010 at 2:29 pm
Cuz the goverment is a greedy MoFo. They want their piece of the pie.
v b
March 8th, 2010 at 2:57 pm
It’s not a gift, so gift tax doesn’t apply (and by the way, gift tax is on the giver, not the person who got the gift and no, businesses cannot make gifts).
The issue is the income tax. To my knowledge, the IRS is playing sleeping giant on this one and at some point the winners are going to be very upset. If they get the tax bill they deserve, they will be suing the show producers.
What the shows claim to do is this.
They go to the home owner and have them sign a 14 day rental contract for the show to use their home. They pay the homeowner $20,000 to $50,000 “rent.” They then tell the homeowner that if they rent their home for 14 days or less during a tax year, this money is tax free. (This part is technically true.)
The homeowner leaves, the show comes in and gets everything done in the 14 day window. They claim that all structural changes fall under leasehold improvements, even though these far exceed the commonly understood definition of a leasehold improvement. If they do count as a leasehold improvements, they are not immediately taxable to the property owner. (Leasehold improvements do not include enlarging the building, changing the structural framework, adding elevators. Since the shows leave as soon as they are done, they aren’t exactly making the improvements for themselves!)
Items that are not built in, like a new tv or kitchen appliances are listed on the 1099-Misc and the homeowner pays the additional tax out of the “free rent” I mentioned earlier.
Even if the IRS doesn’t come in and immediately tax the improvements, the homeowner will eventually pay.
1. Their property taxes go up immediately. The types of folks chosen for the shows generally cannot afford any increase in expenses.
2. When they sell, their cost basis is the same as it was before, so their gain is calculated when they sell. While some will slide under the $250K exclusion rule, some will get caught here.
To compound the issue, a few of the winners have gotten the houses re-appraised and borrowed against the new “free” equity. These have hit the news because they used up the loan, didn’t pay it back and lost the home to foreclosure.