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Author: fleg9bo Big funky green star, 20000 posts Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121114  
Subject: Winning a house by lottery Date: 1/17/2009 2:36 PM
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In CA somebody is selling chances to win a house. You pay $150 for the chance and if your ticket is picked, you win the house.

http://tracyhomegiveaway.com/index.html

Would the IRS regard this as a prize like any other lottery winnings, subject to tax? If you win the house would you owe federal and CA tax on the appraised value (less the usual closing costs and the $150 for the entry)? If the house hasn't sold at the appraised value, could you convince the IRS to tax you less given that the actual value of something is what somebody is willing to pay for it?

--fleg
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Author: wrjohnston91283 Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 103707 of 121114
Subject: Re: Winning a house by lottery Date: 1/17/2009 3:35 PM
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If you win the house would you owe federal and CA tax on the appraised value (less the usual closing costs and the $150 for the entry)? If the house hasn't sold at the appraised value, could you convince the IRS to tax you less given that the actual value of something is what somebody is willing to pay for it?

You would have an appraisal done at the time of the transfer to support the amount you report as income. Just because it was appraised at $X six months ago doesn't mean it's worth that now. If it appraises for $Y on the date of transfer, I would imagine you would have a hard time convincing the IRS to use a smaller number, claiming it isn't worth that "to you".

Also, you wouldn't subtract the $150, as it is the cost to enter the contest, not acquire the home. I would imagine the traditional closing costs would apply as normal.

WRJ

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Author: Mark12547 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 103711 of 121114
Subject: Re: Winning a house by lottery Date: 1/17/2009 5:07 PM
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Also, you wouldn't subtract the $150, as it is the cost to enter the contest, not acquire the home. I would imagine the traditional closing costs would apply as normal.

Are you talking about what is owed to the IRS at the time one wins the house, or later when one sells the house?

For winning the house, wouldn't the cost of the tickets to enter the contest be a tax deduction, up to the winnings one had received for that tax year? And then the fair market value of the house would be declared as one's winnings.

When one sells, on the other hand, the basis would be the fair market value of the house at the time of acquisition, plus other acquisition expenses (but not the cost of the tickets to enter the lottery because one already got the tax benefit of that), plus improvements one may have made to the house.

Or is my understanding of the tax law wrong?

Or is my understanding of the house lottery wrong? (I am assuming here that one is winning a house, not winning the right to buy the house, which would have additional mortgage costs, appraisal, etc., associated with it.)

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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 103716 of 121114
Subject: Re: Winning a house by lottery Date: 1/17/2009 5:44 PM
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In CA somebody is selling chances to win a house.

Those are actually fairly popular. I know of a couple of others as well.

Would the IRS regard this as a prize like any other lottery winnings, subject to tax?

Yes sir.

If you win the house would you owe federal and CA tax on the appraised value (less the usual closing costs and the $150 for the entry)?

Not only would you owe those taxes, they generally need to be withheld from the winnings. On a $1 million house, that's probably $330k in Fed taxes and almost $100k in CA tax.

So to claim the prize, you need to fork over the tax money. The usual route is to arrange a mortgage for the taxes that need to be withheld. Then you start the race to sell the house, because you can't really afford a $430k mortgage.

If the house hasn't sold at the appraised value, could you convince the IRS to tax you less given that the actual value of something is what somebody is willing to pay for it?

That's always a challenge with these non-cash prizes -- determining their value. There are no hard and fast rules there. It just needs to be valued at the Fair Market Value on the date it is won, whatever that slippery number happens to be.

A recent appraisal would be one option. The IRS's appraiser might have a different opinion. If it's sold very shortly after it's won, that would be another option. Ultimately, the FMV will likely be negotiated between the IRS and the taxpayer.

--Peter

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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 103719 of 121114
Subject: Re: Winning a house by lottery Date: 1/17/2009 6:00 PM
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Those are actually fairly popular. I know of a couple of others as well.

You mean it's really legal? My first thought was that I'd want to see the CA Attorney General's opinion before I invested $150 in a ticket. After all, remember Lucy & Ethel's raffle so they could go to Europe?

Then again, it is California.

Phil

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Author: fleg9bo Big funky green star, 20000 posts Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 103723 of 121114
Subject: Re: Winning a house by lottery Date: 1/17/2009 7:11 PM
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Not only would you owe those taxes, they generally need to be withheld from the winnings. On a $1 million house, that's probably $330k in Fed taxes and almost $100k in CA tax.

So to claim the prize, you need to fork over the tax money. The usual route is to arrange a mortgage for the taxes that need to be withheld. Then you start the race to sell the house, because you can't really afford a $430k mortgage.


Some people can afford a $430k mortgage and would be happy to do so in order to acquire a $1M house. But coming up with that much cash all at once could be a problem.

Would the IRS let you take title to the house and take out a HELOC to pay them off, assuming you've got the credit rating to qualify? That would be a win-win if the owner could afford the payments on that big a loan.

--fleg

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Author: billjam Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 103724 of 121114
Subject: Re: Winning a house by lottery Date: 1/17/2009 11:36 PM
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A couple years ago I read the story of someone who won the HGTV Dream House the year before. HGTV valued the house somewhere close to a million, I believe. IRS taxed them on the value of the house. They were urged to sell the house but insisted on relocating and moving in because they had always wanted to live in a house like that. That meant they had to buy furniture - lots of furniture for all those rooms. Also meant paying property taxes and utilities. They had moved without having a job at the new location. Even if they had their old jobs, they didn't have near the income to support such a house. They hadn't yet filed bankruptcy but it was only a matter of time. Had they just sold the house and paid the income tax, they would have been left with a nice nest egg for the kids' college fund and retirement. Instead they probably ended up with less than they started with.

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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 103725 of 121114
Subject: Re: Winning a house by lottery Date: 1/17/2009 11:57 PM
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Would the IRS let you take title to the house and take out a HELOC to pay them off, assuming you've got the credit rating to qualify?

No. It's a quirk in the withholding law. Since this is gambling income the tax has to be paid up front.

However, there's nothing to say that it couldn't all be worked out so everyone's at the settlement table.

Phil

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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 103726 of 121114
Subject: Re: Winning a house by lottery Date: 1/18/2009 1:03 AM
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A couple years ago I read the story of someone who won the HGTV Dream House the year before. HGTV valued the house somewhere close to a million, I believe. IRS taxed them on the value of the house. They were urged to sell the house but insisted on relocating and moving in because they had always wanted to live in a house like that. That meant they had to buy furniture - lots of furniture for all those rooms. Also meant paying property taxes and utilities. They had moved without having a job at the new location. Even if they had their old jobs, they didn't have near the income to support such a house. They hadn't yet filed bankruptcy but it was only a matter of time. Had they just sold the house and paid the income tax, they would have been left with a nice nest egg for the kids' college fund and retirement. Instead they probably ended up with less than they started with.

Actually, they ended up getting a mortgage for a bit more than $1 million just before the IRS bill came due, and then sold the home at auction (after having been for sale at a really high asking price for a couple of years) just before they were foreclosed upon. http://www.kltv.com/global/story.asp?s=7451192 and http://www.dallasnews.com/sharedcontent/dws/dn/latestnews/st...

AJ

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Author: vkg Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 103728 of 121114
Subject: Re: Winning a house by lottery Date: 1/18/2009 10:34 AM
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A couple years ago I read the story of someone who won the HGTV Dream House the year before. HGTV valued the house somewhere close to a million

They were eventually able to sell it for enough to barely get out.

You forgot two other items: the house was on property that was a long term lease and they tried to convert it to a bed a breakfast without checking that it violated zoning.

The not owning the land would have been enough to make me bail.

Debra

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