I must admit I love sweepstakes. It’s kind of like winning the lottery without having to buy a ticket. Some of my favorites are the ones run by HGTV. Currently they have several going on.
Urban Oasis – Win a 1,300-square-foot bungalow dressed with furnishings from Overstock.com and located in Asheville, NC, plus a 2016 Acura TLX and $50,000 cash. The grand-prize package is valued at $587,000.
Blog Cabin – Win a renovated mountain retreat located in Coeur d’Alene, Idaho, plus a $50,000 cash prize. The grand-prize package is valued at $950,000.
Just think…$587,000 -$900,000 in prizes! What a life changer! Or, is it?
I got to thinking, what I would do if I were to actually win one of these amazing properties. Hmmm!
Well, I’m not retired and neither are near where I work so I couldn’t move in. I suppose I could vacation there, but what about the rest of the year? Would I turn them into a rental property? That’s possible, but I’d probably need to hire a management company to handle the day-to-day operations.
I know, I’d just sell the place and cash out! Hey, I’d have a bundle…or would I?
If you win the lottery they take income taxes out of the winnings and you get the rest to spend. Not so much when it comes to winning real property like a house or a car. I’m not saying I wouldn’t like to win either of these sweepstakes, but what a headache to deal with.
So, what would I end up with if I won the $950,000 Blog Cabin package, sold it and kept the proceeds?
Income taxes. In order to claim your prize the sponsor must collect 25% Federal and possibly 6% Georgia (for me) estimated income taxes. This means I would need to come up with $237,500 in cash just to collect the prize. That amount could be reduced if I used the $50,000 cash prize towards the withholding, but I’d still need to come up with $187,500. Perhaps I could take a mortgage on the free house. Wait, I don’t own the house until I come up with $187,500. Crap!!!! Guess I need to take a personal loan or raid my 401(k) or something. That’s a lot of money!
Okay, I found the money for the withholding taxes, now what? Well, the winner is responsible for real estate transfer taxes, deed recording charges, closing costs, current and future real estate taxes, title insurance, homeowner’s hazard and liability insurance, and all other taxes, costs, fees, and expenses related to the maintenance of the house.
If I put the house on the market I could probably sell it within 3 months. Hey, it’s an HGTV dream home. I’m sure buyers will be rushing in.
I’m thinking that I’d need another $11,000 to cover the real estate taxes, insurance, miscellaneous fees and principal/interest on the personal loan I took out to pay the withholding taxes for 3 months. Hmm…maybe I should have gotten a bigger personal loan.
Yea, the house sold for the $900,000 estimated value. Real estate commissions?? Yep, got to pay a $54,000 commission to my realtor. Damn, they made off like a bandit. I should have negotiated a better rate.
The house is sold, I’ve paid the realtor, covered the transfer costs, federal and state income tax and paid off the short-term loan. Looks like can pocket a cool $500,000!!!!
Wait…what…Capital gains taxes on the sale of a non-primary residence? Damn, I already paid Uncle Sam and Auntie Georgia $388,000 in income taxes. Now they want to tax the gain on the sale of my free house too? Oh good grief.
If I sold the free house for $900,000 in less than a year I’d also have to pay capital gains (ordinary income) taxes on the full sales amount, less commissions. Ca-ching! Another $385,700 in income taxes off to Uncle Sam and Auntie Georgia.
Oh, and since I would have $950,000 in sweepstakes winnings and $846,000 in capital gains the income from my day job will end up being taxed at the highest tax rate for the year.
It would seem that after selling this place I’d be lucky to pocket $87,205 (9% of the prize).
I must be missing something! Maybe a good tax advisor is in order. I wonder what that will cost me?
Don’t get me wrong, $87,205 is better than $0, but it’s a whole lot less than $950,000!
Now if I were to keep the house for a year and then sell I would only pay Federal and State long-term capital gains taxes of $219,960 and could pocket another $165,816. Ah, perhaps that is the silver lining?
Now, back to my daily sweepstakes entries. At least if I win I know I won’t be able to quit my day job just yet!
Having dreams is what makes life tolerable. ~Rudy
Note: Many of the HGTV home sweepstakes offer a cash in lieu of the house option. Those seem like a much better deal.