Last night, my husband and I watched Extreme Makeover: Home Edition. They were rebuilding a home for a local family here in Tenn. Being the tax nerds that we are, my husband and I began discussing the tax implications of having a TV show upgrade your home.

It's sad, the show picks people who are in dire straights, but it's entirely possible that the tax burden for the improvements could bankrupt them.

This morning, my husband, using his mad law librarian skills, sent me not one, but two scholarly papers on the tax implications of Extreme Makeover: Home Edition(1). Interestingly, the IRS hasn't taken a stand on the issue at all.

The show uses an interesting tax loophole to claim that the upgrades (or even the building of a brand new house) are tax free. Under the IRS tax code(2), if you lease your primary residence out for less the 15 days, the income you earn under the lease is tax free. So what the show does, on paper, is lease the residence for $50,000, paid in appliances and other fixtures. The labor is volunteer labor from the community so it is not included in the cost of the upgrade.

Also, if a lessee makes improvements to property, those improvements are not taxable to the lessor(3).

If the IRS chooses to look into this, it probably won't hold water. The IRS uses a "substance over form" doctrine for ruling on tax issues. That is to say, the IRS doesn't look primarily to how something is set up on paper, but to what is actually going on in reality. The IRS has mixed success actually following its substance over form doctrine, but in this case, the substance is pretty clear.

Interestingly, I doubt that the IRS will look into this overmuch. The show works very hard to find families in extreme need. For example, the episode last night- a family's home was completely destroyed by a tornado. Father is a firefighter, mother was a medical tech. Note the "was." She threw her body over her two children to protect them from the house collapsing in on them and is permanently paralyzed from the waist down. When the show was filmed, she had been out of the hospital, where she spent three months, for less than month. The IRS does not particularly want the bad press for going after families that have suffered extreme tragedy and are the recipients of corporate and community charity as a result- even when that charity comes in the form of an hour long advertisement for Sears and any number of name brand appliances and tools.

Frankly, I agree with the most likely public sentiment- these people shouldn't be asked to shoulder the tax burden of either community charity or of the corporate advertising that benefits them. To do so would make the show go from being commercial, but with a true benefit to the recipients, to strictly exploitive. It's a purely emotional appeal, but somehow, having a home that is handicapped accessible and a pool in the backyard doesn't make up for three months in the hospital and the loss of one's legs.

On the other hand, should the family choose to sell the property rather then keep it for their personal use, I am all for the improvements affecting their capital gains on the selling price the property brings. It being the primary residence means that there are ways to avoid many of the tax implications of the sale, but if the money is not reinvested into a new primary residence, then the sale does become, IMO, a commercial profit making venture and should be taxed as such.

Anyway, I found the articles fascinating and the whole concept of the tax implications of receiving charitable giving very fascinating. I may look further into it.


1. The Unexpected Tax Consequences of "Extreme Makeover: Home Edition" by Jennifer Nash and The Extreme Home Renovation Giveaway: Constructive Justification for Tax Free Home Improvements on ABC's Extreme Makeover: Home Edition by Brian Hirsch.
2. I.R.C. Sec. 280A(g)
3. I.R.C. Sec. 109