Tom Kelly: Who can afford the tax on a raffle home? Most take the cash

The challenge of purchasing a home in a hot housing market has bolstered non-profit fund-raising efforts while boosting the dreams of potential homebuyers priced out of rapidly appreciating neighborhoods.

One of the better promoted examples has been the recent raffle campaign by Special Olympics, highlighting a $4 million, 7,930 square-foot, six-bedroom West Coast home plus a variety of other prizes that organizers say has been pushed along by $700,000 in advertising. The house raffle has earned Special Olympics $1.8 million since it was started in 2014.

Tickets to this year’s raffle are $150 each, three-packs for $400 each or five-packs for $550 each. The Grand Prize winner chooses either the Dream House or $4 million in cash.

Here’s the exciting dilemma that lingers just below surface. The Internal Revenue Service considers the house and other prizes in the raffle a “gift” and thereby taxable to the winner. According to Rob Keasal, real estate tax specialist in the accounting firm of Peterson Sullivan, a couple filing jointly in the 25 percent tax bracket would owe approximately $1 million in tax on the $4 million home. A couple in the next bracket would owe $1,559,666.

I don’t know many families who could handle that tax liability and occupy the home. Most would take the cash, pay the tax, and buy a home elsewhere.

“It is the reason why we always give people of the large prizes in our raffles, whether they be cars, vacations, or the home, a choice between the non-cash prize and a cash alternative prize,” wrote Neal Zeavy, raffle director. “Alternatively a winner could sell or leverage the home to help pay the taxes. As my mother likes to say, ‘it is a good problem to have.”’

According to Zeavy, Special Olympics reached out to the homeowner’s realtor to see if they would be interested in partnering with the organization for the raffle. The two parties entered into an option agreement whereby the organization will exercise the option and purchase the home if the raffle sells the threshold of tickets to make the home available and the grand prize winner opts for the home in lieu of cash. If the raffle does not sell enough tickets to make the home available or the grand prize winner opts for cash in lieu of the house, then the option expires and the home remains with the homeowners.

According to Dan Wartelle, vice president of communications for Special Olympics, more than 2,000 total prizes will be given away this year including cars, vacations, and electronics. The odds of winning a prize are 1 in 20. Individuals who purchase three or more tickets are automatically entered into the multi-ticket drawing for a Lexus GX SUV or $50,000 cash. Again, if you win the car, plan on coming out of pocket to pay the tax.

The house also has 5.5 bathrooms, a gourmet kitchen, water views, home theater, billiards room and home gym. If fewer than 37,000 tickets are sold the grand prize will become a cash amount equal to half the net proceeds, not to exceed $4 million.

The auction idea has had a long and storied history that includes desperate sellers, junky properties that few wanted and marginal methods. The concept has been polished and streamlined and most “essay contest” options have been eliminated. That’s because many states consider any activity that includes “prize, chance and consideration” as gambling and must be properly licensed and regulated. Typically, raffling off a house in those states would be prohibited because it is based on chance. A lottery is similar. Some skill may be involved in choosing the numbers, but it’s mostly chance or luck.

The essay contest has been an alternative road to raffling off a home. (“For $250, state in 300 words or less why you want to live in Pleasant Valley”) The controversial step behind the essay contest is proving the contest was totally based on skill, not chance. But the questions arise: Who are the judges? How were they chosen?

The raffle concept usually is more acceptable to state officials when a non-profit is involved. For years, consumers have tried to market their own single-family homes via a raffle or similar contest but most plans have a difficult time meeting legal guidelines. Many states now have comprehensive documents outlining the requirements for non-profit home raffles.

But who could really afford to move in?