The big fundraiser at our parish raffle every year was a new car “donated” by a local dealer. The pastor said the winner usually decided to take the cash alternative because few winners wanted to pay the tax due on the car.
“The chance to win a car has more sizzle than the chance to win cash,” the pastor said. “We sell more tickets by selling the sizzle.”
One of the better promoted examples has been the recent raffle campaign by Special Olympics in one state, highlighting a 4,700 square-foot, four-bedroom waterfront home plus a variety of 3,250 other prizes including a 2019 Mercedes Benz C-Class coupe.
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 waterfront home 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, 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.
Special Olympics always makes known that winners of the large prizes, whether they be cars, vacations, or the home, have a choice between the non-cash prize and a cash alternative prize.
I don’t know many families who could handle that tax liability and occupy the raffle’s luxury home. Most would take the cash, pay the tax, and buy a home elsewhere. I wondered what percentage of the Special Olympics raffle participants were aware of the tax consequences when they chose to enter.
The state’s Special Olympics spokeswoman wrote that in the four years she has been associated with the auction, no one had asked the question. She did note that each of the past three raffle home and car winners had chosen to take the cash.
In a typical luxury raffle, an organization and a homeowner enter 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. Newman wrote that 62,000 tickets needed to be sold for the home to be in play.
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 Porsche 718 Cayman or $50,000 cash. Again, if you win the car, plan on coming out of pocket to pay the tax.
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 contests but most plans have a difficult time meeting legal guidelines. Many states, including Washington, now have comprehensive documents outlining the requirements for non-profit home raffles.
All sell some kind of sizzle. The winners, however, usually take the cash.
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