$Million+ House for $10 Raffle – Don’t forget the Taxes!

by Darwin on April 4, 2009

As reported by the South Florida Sun Sentinel, a Fort Lauderdale couple has decided that since their house that they purchased for $2.35 Million in 2005 isn’t selling, the next best thing to do is to raffle it off.  They’re intending on raffling off 300,000 tickets for $10 each.  It’s a pretty sweet looking house as you can see below, but there may be some “fine print” or no print at all that you have to figure out yourself before taking the plunge.

Could be Yours for $10 (oh, plus tax!)

Could be Yours for $10 (oh, plus tax!)

What potential bidders should consider is whether there are tax implications if they win.  The fine print in the “terms” states: “Saint Simeon Church is obligated to report the value of the prize to tax authorities as income…All federal, state and local taxes associated with receipt or use of prize, including without limitation all applicable sales, use, luxury, income and special taxes are the sole responsibility of the winner.”  Of course, if they could bridge the win and re-sale by tax time and have the liquidity to pull it off, I’m sure they’d come out ahead in the end (assuming the home doesn’t decline another 50% during the time it takes to sell it).  But, let’s say you’re looking at a $2Million valuation (generous, given $2.35 Million at the peak of the real estate bubble in one of the worst markets in the country – See Case-Shiller Index and How to Invest/Hedge Real Estate) and the federal, state and local taxes owed are say, 40%.

That would be a $800,000 Tax Bill!

Couple that with a sale.  If there’s transfer tax in Florida like many other states, as well as taxes on any gains during the time from possession to sale, some more taxes.

I was also thinking about the math on the raffle.  Hmmm.  300,000 tickets at $10 = $3Million.  So, between the couple and the church that’s administering the raffle, they’re taking in $3Million on a home that likely wouldn’t even fetch $2Million.  A $1Million Profit (or 50% Profit) for some ingenuity in turning a bad situation into an innovative opportunity?  Not bad, huh?  On one hand, the odds are clearly in favor of “the house”, but still a better payoff to odds ratio than a typical state-run lottery.

The auction can be referenced here.

Disclosure: I have not bid, nor do I intend to.

You're Not Following Darwin's RSS? Check out Why You Have to Subscribe to Darwin's Finance!

If you enjoyed this post, you can get free updates through RSS Feed or via Email whenever a new post is published. Rest assured that you can unsubscribe at any time via the automated system and your information will not be sold, archived or utilized for any other "nefarious" purposes.

{ 1 trackback }

The 32nd Bankruptcy & Debt Carnival - We’re Back!
April 13, 2009 at 11:11 am

{ 3 comments… read them below or add one }

1 Dave in Jersey December 12, 2009 at 9:22 pm

Lately, I have read several blogs rambling on about how big of a burden it would be to the person who wins this house “me of course” because of the tax liabilities. Now, I’m no CPA but I do have a pretty good GPA and one thing that I do I know is ten dollars for a two and a half million dollar house is never a bad deal. Taxes, who cares? Even with a 40 percent income tax hit and a 28 percent capital gains hit you would still walk away with enough cash to have a very Happy New Year. Um about those capital gains taxes, well I’m sure any bank would love to take ownership of the house in a reverse mortgage. Gee I wonder what the monthly checks would be on 2.3 million.

[Reply]

2 BadBoysDriveAudi March 21, 2010 at 7:09 pm

Dave,

You are, of course, forgetting about the additional taxes the winner would have to pay — such as any state, local and transfer tax that may also be in play. And then there’s the commission fee you’ll incur if you sell it.

If you decide to keep it, don’t “bank” on the bank viewing the property as worth $2.3 mil. If it were worth that, it would sell. The fact that we’re discussing this raffle means that the fair value is actually a bit less. So now the bank has to figure out that value, compare that against the tax fees (which is what you’ll ask for as a mortgage), and then judge the winner’s ability to pay the mortgage.

Your suggestion of a reverse mortgage is interesting but it still has the topic of fair valuation in play (not to mention the possibility of further price depreciation in the near future). The bank gives the winner a lump sum payment so they can pay the taxes but how do they (the bank) get their money back? The winner doesn’t pay a mortgage note until they die or sell the home. In the meantime, the interest just gets added to the lien on the property. I don’t see the bank jumping all over that if the winner is young and there isn’t a big, BIG cushion between the home value and the capital needed to pay off the taxes.

Darwin, the reference link to the auction is broken.

[Reply]

3 Darwin March 21, 2010 at 7:57 pm

Very good points BadBoy.
I presume the auction’s over now since old post, but once this one occurred, surely there will be more like it. Got a lot of press judging by the search traffic for this particular post.

[Reply]

Leave a Comment

You can use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>