A Harsh Tax Makeover
By STEVEN ISBITTS, ADAM EMERSON and DAVID SOMMER The Tampa Tribune
Published: Apr 28, 2005
ST. PETERSBURG - First the disadvantaged family wins a complete house renovation, furniture, appliances and other amenities on ``Extreme Makeover: Home Edition.''
Then come the tax bills - drastically increased property taxes and likely a six-figure income tax bill due the Internal Revenue Service.
Winners dealing with greatly rising taxes is one reality that is not mentioned during the hit ABC reality TV show, which features the Dolan family of St. Petersburg in its next episode, airing 8 p.m. Sunday.
James Dolan, 30, was blinded in November when he was shot in the head while working at a St. Petersburg RadioShack as a manager-in- training.
``We are pretty up front with our families about taxes before we start. We encourage them to go to their own tax attorneys and use our accountant,'' said Tom Forman, executive producer of ``Extreme Makeover: Home Edition,'' produced by Endemol USA and purchased by ABC.
``We want them to know what they are getting into,'' Forman said. ``As families move along in the process from applicant to someone on our short list, there are mountains of paperwork, and discussing taxes is part of it.''
At the time of the RadioShack shooting, Dolan was living in a small, 44-year-old house on 99th Way with his wife and three young children.
For 2004, the Pinellas County property appraiser assessed the value of the house at $131,100.
Thanks to the show, the Dolans live on the same parcel of land but in the fanciest house in the neighborhood: a home with 3,500-square-feet of enclosed living space that is twice the size of their old place. It was was built in less than one week in March by a team of local contractors.
Property Tax Cap Doesn't Help
The Dolans' property tax bill will not be affected in 2005, but for 2006 it could be at least three times the roughly $2,000 they will owe for this year.
The new house would be worth about $450,000 in a neighborhood where that type of house typically is found, said Craig Gallagher, president of Lexington Homes of New Port Richey, the contractor that built the house and donated a majority of the building costs.
Florida's Save-Our-Homes cap, which limits property tax increases on a Floridian's primary residence, is not applicable to the new house.
``A full renovation, in effect, eliminates the cap,'' said Jim Smith, Pinellas County's property appraiser.
There is not much the Dolans can do to avoid a significant increase in their property taxes, said Beth Daniels, a Clearwater lawyer who specializes in challenging county assessments.
By law, Smith's office must evaluate the Dolans' new home based on eight criteria including construction quality, square footage, replacement value and the price a property likely would command on the open market, Daniels said.
The tragedy that befell the family when Dolan was shot and blinded is not a factor that can be considered, she said.
Because their new home is in an older neighborhood of smaller homes, that could keep the appraised value down, Daniels said.
``What you spend to build it is not necessarily indicative of what it's worth to an actual buyer,'' she said: In that price range, a home buyer might prefer to live in a neighborhood among similarly valued homes.
Income Tax Loophole In Doubt
As for federal income taxes, Forman said that Endemol USA informed the Dolans and past show winners that they will not have to pay the IRS for receiving a new house.
Many tax experts, though, are skeptical of the tax loophole cited by Endemol.
Forman said Endemol informs show applicants that the U.S. tax code states that income, including home improvements, derived while renting a primary residence for less than 15 days is not taxable.
To produce its programs, Endemol USA rents the homeowner's property for less than 15 days, during which it is radically remodeled or razed and a new home is constructed using round-the-clock labor.
``The IRS is not commenting on `Extreme Makeover,' '' IRS spokeswoman Gloria Sutton said.
When asked about taxes incurred by show winners, ABC spokeswoman Marsha Smith said, ``ABC does not answer those questions.''
Janice McClendon, a tax law professor at Stetson University College of Law, calls Endemol's tax loophole argument ``silly.''
It does not matter if the payment comes in cash or in appliances, she said. ``Lease payments are income to the recipient.''
The Internal Revenue Service could charge the Dolans up to 35 percent of the value of the home and its contents.
However, enforcing income-tax payments from the Dolans or from others featured on the ABC show may be an unpopular move for the IRS, McClendon said. In recent years, the agency has worked to improve its public image.
``I'm not sure the service wants to get in this can of worms,'' McClendon said.
It may be too early to compute the income tax implications of ``Extreme Makeover: Home Edition,'' which has aired 38 shows since its debut in December 2003. Many of the show's award winners only recently have filed their 2004 federal income tax returns.
Community Pitches In
The Dolan family, which according to family spokesman Ric Cornelius has raised more than $60,000 in a family trust, declined requests to be interviewed for this story.
Cornelius said the Dolans are making preparations for future taxes and have been consulting with tax experts.
The Dolans are carrying a $134,000 mortgage financed in 2003, according to Pinellas County court records.
``We are working to keep them in the house,'' Cornelius said. ``After all they have been through, taxes are not their first priority.
``James has been spending a lot of time training with his [service] dog, and the family is enjoying the house and adjusting to their new life.''
During Sunday's telecast, viewers will see the Dolans presented with a check for $100,000 for future expenses.
Cornelius and Craig Gallagher, the Lexington Homes president, said that if the money raised through donations is not enough to cover the Dolans' tax bills, they are confident the community will step up to support the family.
Forman said no ``Extreme Makeover: Home Edition'' winners have sold their houses for any reason, but they are not obligated to keep them.
``We customize each house so much to meet their needs that I don't think anyone wants to leave,'' Forman said.
``That's the whole show. These are real families living real lives, and they will choose to do what they want with their property.''
Reporter Steven Isbitts can be reached at (727) 451-2336.