Tax Guru-Ker$tetter Letter
Tuesday, May 11, 2004
Extreme Tax Makeover
In spite of the fact that many aspects of the show are faked (we're supposed to believe that the homeowners don't know the design team is coming, yet everyone is dressed and waiting by the front door at 7:00 am), Sherry and I have been enjoying the ABC show "Extreme Home Makeover."
The thought had obviously crossed my mind as to how the homeowners are taxed on the hundreds of thousands of dollars in improvements and furnishings they are given. This very issue has lead to some interesting discussions on Paul Caron's blog, as well as an article in Newsweek.
As creative and aggressive as I am with designing tax savings strategies for real life people, I have to side with the group of tax pros who are skeptical of ABC's attempt to classify all of the new stuff as tax free rental income, exploiting the long standing exemption for income generated by property rented for fewer than 15 days in a year.
My understanding is that, as with anything as lucrative as this, there are thousands of homeowners who apply to be on the show and to be selected is really no different than winning the lottery, and should be treated as gambling income for tax purposes. There could be some adjustments in the dollar values reported. I definitely wouldn't report full retail values. However, to consider it as 100% tax free is beyond even an approach I would take. I wonder if ABC indemnifies the homeowners and will pay their additional taxes if they are audited and forced to include this income.