I was involved last year in a local taping of "Extreme Home Makeover." Long story short, I was called onto the set to provide chiropractic care to some of the cast, crew and staff on the site.

I actually had the same question and the story I heard goes something like this: The house and all materials/labor are donated. Sponsoring mortgage companies, banks, etc. also donate money to an escrow account that go towards paying property taxes, utilities, etc. for a certain amount of time. The fund has enough to cover these things plus "extra" for the income taxes the new owners would be liable for. To rephrase what AutoXer had said, If you got $100k and got to keep $60k of it, you still came out ahead.

Don't forget that these houses are turnkey. No taxes, utilities or mortgages to pay. They even get vehicles and tons of craftsmen tools from Sears for free. All they really have to pay for is food.