Win a Prize, Pay the IRS Tax

Diane Giraudo McDermott – September 12, 2010

Recently I read several articles regarding the tax associated with winning a house raffle. The authors proclaim doom and gloom over having to pay income tax on the value of the prize home. I find this daunting because every year we are burdened by having to pay income tax, so I find it interesting that having to pay taxes when you win a house raffle could become a stumbling block. Take a look at this example: Your $100 raffle ticket wins you a home valued at $200,000, and you may have to pay approximately $50,000 in IRS taxes—25% of the value of the prize less the cost of the ticket. That means you just received a home valued at $200,000 for $50,000—one fourth the value of the home. I think that’s a fantastic win. If you were to get a bank loan at 6% for this $50,000 tax burden, your payment would be only $299.74 per month on a 30 year amortized loan.

If you choose to live in the home, then you’ve got a sweet mortgage under $300 a month, or if you rent the property out, surely, the rent will more than cover that tax burden, the property taxes, the insurance, and leave you with a positive cash flow. As a real estate investor, finding a home to purchase with a sales price that is one fourth the value of the home would be a killer deal—this is what investor’s dream of. And buying a property on the courthouse steps at a foreclosure auction rarely gets you this good of a deal.

I realize that some grand prize homes are valued at one or two million dollars and the winner might struggle to come up with the IRS tax amount. That’s why it’s critical that the nonprofit organization that is holding the raffle, offer a cash prize instead of the home which makes it simple to pay the tax burden.

Yes, we would love to get the home for just the price of the ticket and wish that the IRS would give us a free ride on this one, but let’s not diminish this wonderful prize. House raffles continue to be a win-win for all parties. Remember to choose house raffles with a winning raffle formula–they have a much better chance of reaching a successful drawing!

Good luck!

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