Sunday, May 9, 2004
Extreme Makeover = Extreme Taxes? Tax Consequences of Home-Makeover TV Shows
Monday, May 10, 2004
This week's Newsweek has a great article on the tax consequences of one of the hottest reality TV show crazes: the home-makeover. It is well-settled that TV game show participants must report their winnings as income, although valuation of in-kind prizes often proves troublesome. In one of my last cases in practice before entering the academy in 1990, my law firm represented a homeowner featured on the PBS show This Old House. We succeeded in convincing the IRS that our client should report as income not, as the IRS initially claimed, the retail fmv of the products and services used to improve his home, but rather the (smaller) increase in the fmv of his home post-makeover. The tax lawyers advising ABC's Extreme Makeover: Home Edition have come up with a better, more creative solution (if it works):
ABC leases participants' homes, paying $50,000 for the 10-day rental. But instead of paying the "rent" in cash, ABC treats the provision of flat-screen TVs, applicances, etc. in the home-makeover as the rental payments. The ABC tax lawyers believe this makes these amounts exempt from tax under Code section 280A(g), which excludes income derived from short term rentals of a home for less than 15 days. Why didn't I think of that back in 1990!?!
Newsweek contacted 6 "outside tax professionals": "While some called it clever -- even 'elegant' -- most scofffed at the show's approach, saying the IRS would be highly unlikely to agree with all aspects of it." Newsweek picked a great homeowner to profile in the article -- a National Guardsman deployed in Iraq who is concerned that the makeover of his Southern California home will leave him subject to tax on the 250k worth of improvements.
https://taxprof.typepad.com/taxprof_blog/2004/05/tax_consequence.html
Comments
Is there a published decision in the case mentioned above involving This Old House or any decision involving tax implications for owners participating in shows like This Old House or HGTV?
Posted by: Nicole | Nov 1, 2007 11:18:51 AM
Extreme Makeover's tax concept is totally bogus, it's nothing but a con to evade taxes. The TV show should pay the family's income tax liability instead of using this criminal tax dodge that robs all the rest of us taxpayers and could come back to burn the family if the IRS ever says enough is enough with this baloney. The way I see it, ABC and Sears and Disney are evading taxes that they obviously can afford, though their rich executives might have to make do with one less set of diamond cufflinks.
Posted by: Brian | Oct 24, 2007 10:12:57 AM
I think there should have been an evalution of the neighborhood's values first and completed the makeover based on the potential value of a home in that particular area. I just saw the last espisode with the mother and her three children, who's house was destroyed by fire and the the house completely looked out of place. I LOVE the show, I feel that it is a wonderful thing that you could potentially start your life over with a new home and the nice things that come with it. But, the homes should be renovated or built according to the neighborhood and what they could potentially afford in the future.
Any thoughts?
Posted by: Rick | Oct 19, 2007 3:42:29 PM
What about real estate taxes on a home that may have only been valued at $50,000 or even less. By the time these guys get finished with these television homes, they have to be worth hundreds of thousands of dollars. The people who own the home still have to pay real estate taxes on these, and those costs can be crippling to families with limited income in the first place.
Posted by: Jeff | Sep 16, 2007 4:51:02 PM
I recently won money on Wheel of Fortune. Curious as to how those winnings are treated with regard to federal income tax. Are they treated as ordinalry income? Or are they treated separate and taxed at a flat rate?
Posted by: T Weatherill | May 23, 2006 10:11:53 AM
Income tax issues aside, the increased value of the home will surely drive up the PROPERTY taxes of these homes. If the families are cash-strapped to begin with, an increase of several thousand $ PER YEAR in property taxes will be a hard bullet to swallow.
And what about the annual maintenance and insurance on the new home? More expensive homes with more expensive toys means you have to pay higher insurance rates and possibly even security to protect your assets (now that all your goodies have been broadcast to millions of viewers).
I'd recommend selling the home and buying something whose annual taxes, maintenance, and insurance you can afford.
Posted by: Wendy | Nov 5, 2004 10:32:10 PM
Last option: sell house immediately after remodel. Gain less than the $250k (single) or $500k (MFJ) and you've met the 2-out-of-5 rule...tax free. Woohoo!
Posted by: Carrie | May 14, 2004 7:51:21 PM
I know of people in Mabibu who rent out residence, yard, for weddings. They get as much as $10,000 for the day. All tax free?
Love the tax code!
Posted by: Ray Stahl, EA | May 10, 2004 4:01:06 PM
It may well be that the lease rate they are talking about is what a film/TV production company pays the homeowner to take over the house for filming purposes. This usually is in thousands of dollars per day (I think the daily rate is approximately what the normal monthly rental would be).
Many LA homeowners with "interesting" houses do this fairly regularly. I've been approached for this, but never done it, mainly because friends who have done it say that no matter how conscientious the production company is, they never get the house restored quite right, and you tend to piss off your neighbors by bringing all those trucks into the neighborhood.
I'd be virtually certain that they will try to defend the strategy with this argument, even though the usual reason for the very high lease rate is quite different.
Posted by: Curt Wilson | May 10, 2004 11:59:01 AM
Are you sure that the rental value of other homes in the area is a good yardstick for measuring the reasonableness of the rent, though? Remember, this wasn’t a house rented for people to live in; it was rented with the specific purpose of being used as the principal (and only) shooting location for an episode of a television show. When you look at it from that perspective, I’d be willing to bet that $3,500 a day is at least closer to reasonable than what you would otherwise think.
Posted by: Alex | May 10, 2004 11:53:36 AM
I should think that ABC's approach would stand or fall on the reasonableness of the "rent."
If similar homes in the area rent for at least $50,000 for less than 15 days rental (i.e., somewhere north of $3,500/day), then it should not matter that the lessee's payments are made in-kind rather than cash.
If, as I suspect, the homes in question would let for substantially less than that in an arm's-length transaction, then it seems clear that the homeowners are receiving something more than rent for a short-term lease of their home. What you label it and how you value it are different questions, but I think that it's income, and non-excludable income at that.
Posted by: Jeff Silver | May 10, 2004 10:49:02 AM
I am curious as to the contents of the appraisal that supported your law firm's position. The actual costs expended would not normally be based upon opinion whereas the appraisal would. Many times the fmv of a house may actually increase substantially greater than the amounts actually expended, especially in a sellers' market. Did the IRS actually accept the lower fair market value or is the statute of limitations still open?
Posted by: Shag from Brookline | May 10, 2004 4:15:30 AM
What about ABC creating a "non-profitable" charity to do the houses. ABC agrees to cover expenses. I am curious as to see whether or not this would make any difference.
Posted by: Rich | Jan 6, 2009 3:40:27 AM