So you've just won a dream home, congratulations. After the initial excitements wears off, however, you may find a nasty little surprise waiting: taxes. According to the IRS, all prize money is eligible for taxation. Unfortunately, this also applies to prize assets, meaning that you may be stuck with a big bill. Handling the tax burden of an immense prize can take a little doing, but it is possible.
Request a 1099-MISC from HGTV. Companies delivering prizes must provide you with a 1099-MISC that indicates their appraised value of the prize. When it comes to the HGTV Dream Home, this usually means a home worth several million dollars, $250,000 in cash and the value of a car that comes with the home.
Hire an outside appraiser. While it's not always the case, many prize-givers overstate the value of the prize, which makes the prize seem more amazing in their press releases and marketing. You should hire an objective outside party, either an accountant or property adviser, to make a more realistic appraisal of the assets you have won.
Call the IRS at (800) 829-1040 if the appraisal figure differs in your favor from the 1099-MISC provided by HGTV. Request that the IRS agent fill out an internal form, Form 4598. Form 4598 is an internal memo that flags an incorrect 1099. The IRS will send a notice to HGTV, which will have 10 days to respond.
Input the final value determination into your 1040 tax form. Prize money goes on line 21.
Arrange an installment plan. An accountant can help you set up a plan to pay off the huge tax burden gradually. However, many prize winners find that the only way to lift the tax burden is to sell the sudden begotten assets.
Pay property tax. In addition to the initial income tax, since the prize is considered an asset, you will be responsible for yearly property tax on the property. If zoning laws permit, you can pursue exemptions from certain forms of property tax by leasing the property for grape-growing (as would have been appropriate for the 2008 Dream Home in Sonoma, Caliornia) or other use pursuits.