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Economy / Taxes

There Is No Such Thing As A Free Lunch, Part 1

By David Stokes on Apr 9, 2007

Today’s Post-Dispatch has a valuable AP story on recent Kansas City-area participants in the ABC television show, "Extreme Makeover," and their recent tax complications.  The story closely resembles the issues audience members of Oprah Winfrey had when she gave them all cars.  At the time, I recall thinking what a bunch of ingrates the Oprah audience members were when they complained about the, surprise, gift tax bills on the cars.  So what if they owed $6,000 in taxes, they still were given a $30,000 car which they were and are free to sell at any time.  But I digress.

The Kansas City story is different, if only because the family in question was genuinely in need of help, as opposed to being a TV audience member, and they appear to truly need the home.  I have to imagine the producers have some rule against selling the house right away, lest the whole point of the show be lost and replaced by just handing people a check, which nobody would dispute is taxable.  ABC is trying to claim that the dramatically improved home is not taxable (as income) as if falls under perhaps the only example of a free lunch in US tax policy – the rule that home rental is not taxable income if you rent the home for two weeks or less.  The IRS is having no of this, stating that the improvements are a gift and taxable as such. 

The family has, in my opinion, received a second gift from the Jackson County assessor, which valued the new, improved home at $200,000.  As the improved home is 4,500 sq. ft. with new fixtures in the Kansas City-area, the 200 K number seems impossibly low.  The solution to the issues is clearly tucked away in the article.  As the family owns the home outright, they should merely take out a large home equity loan to pay off all other monies due, and then treat the home equity loan like a mortage…a very small mortage for the house they live in.  I wish them the best.  I will certainly try to watch the show on May 13.  In the past I have only watched the final five minutes of the show, as my wife and I turn on ABC in preparation for the greatest TV show since Jason Batemen defined high school for a (very brief) generation.   

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About the author

David Stokes

Director of Municipal Policy

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