I have entered a contest where the prize is a house, whose market
value is said to be $610,000. It is a newly built two story-four
bedroom, 2 bath house w/hardwood floors, fireplace and a detached
garage. It is
located in the town of Riverhead, Long Island on nearly an acre of
land adjacent to a conservation area. If I win this house, what will
 my upfront local, state and federal costs include (i.e.gift tax,
property tax, etc)? Does the law allow payment of any of the
municipal, state or federal taxes overtime? Are there any tax
loopholes of which I can take advantage?  Or, are the initial costs of
winning such a price so enormous that it makes better sense to sell
the property ( I live in another state)?  If I should decide to sell,
what is the real estate market in
the Riverhead area? Would it make better sense to market the house
as a summer or 2nd home or is there a strong community of
potential market of buyers who live in the area year around?  Is there
any proximity to the Hamptons? And, would that would help sell the house as a
summer or 2nd home? Can this house bring more than the $610K it is
projected as costing?  It is often presumed that winning such a great
prize isn't so great because upfront costs to the winner may be
prohibitive to keeping the property. The property is mortgage free
which does provide the opportunity to secure a loan to help pay costs.
What is the best way to go about selecting a financial institution for
such a loan? I need any and all information that would make winning
such a price an asset rather than a financial burden.
Any and all suggestions would be appreciated!

Hi saabster-ga,

I've mentioned on here before that I am a licensed Real Estate
Broker--yet, I've never encountered this type of question before! So,
naturally, I decided to figure out the answer.

If you are lucky enough to win the home in NY state, that you say is
worth $610,000, the IRS takes it as if you have won $610,000 in cash.
So, assuming you earned $50,000 in salary, your "income" for the year
would be a whopping $660,000! That would of course easily put you into
the top tax bracket and cause you to owe a few dollars in tax.

I was able to find an article that discusses the tax implication of
winning a home. It can be found here:
http://www.thinkglink.com/article.asp?Title=Win_A_House_And_A_Large_Tax_Bill_And_Keep_The_Change.htm&ID=159

In your question you suggest a number of possible scenarios to deal
with the property. The best, and probably most obvious is to simply
obtain a loan, secured against the home, that will cover the cost of
the taxes owed. The taxes will be approximately $210,000 (that's
assuming next to no deductions, etc.. Your personal milleage may
vary!). You can calculate estimated taxes at TurboTax's website:
http://www.turbotax.com/ts/t_and_r/calculators.html

As far as selling the property vs. paying the tax on it... Remember,
you still "received" the money as far as the IRS is concerned. When
you sell it, unless you do a 1031 Exchange (which is for investment
purposes only.. Consult a professional on this option!!), you will owe
capital gains tax. Typically, capital gains taxes are around 25% of
the "profit" you made. However, you would only pay if the home was
worth more than $610,000... If you sold at a loss, there might be some
offsetting deduction you can take that would help reduce the tax
burden.

As for finding the right mortgage, I always recommend contacting a
Mortgage Broker in your area. They are able to "shop" around for a
mortgage--without damaging your credit. What that means is that they
can find the lowest cost mortgage for you, in your particular
situation. In the alternative, I personally would look for a loan that
is an adjustable rate, with NO prepayment penalty, low or no points,
and a flexible payment option (i.e. negitive amortization option,
interest only option, and fully amortized option). Washington Mutual
has a really nice ARM mortgage, as do most other large financial
institutions.

I hope that answers your question... If any part of this is unclear,
please do not hesitate to request clarification prior to rating and
thus closing this question.

Legolas-ga

Search terms:

win house tax
tax owed on $660000 income
income tax calculator

Also, because this is within my realm of personal expertise, some
information was simply in my brain at the time I answered this
question :-)

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Request for Answer Clarification by saabster-ga on 01 Sep 2004 11:39 PDT

This was excellent work and I plan to share it with other participants
in this contest. The tax implications of winning a house was uppermost
in everyone's mind.
Thanks again!

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Request for Answer Clarification by saabster-ga on 01 Sep 2004 11:39 PDT

Legolas-ga

This was excellent work and I plan to share it with other participants
in this contest. The tax implications of winning a house was uppermost
in everyone's mind.
Thanks again!

---

Clarification of Answer by legolas-ga on 01 Sep 2004 17:04 PDT

My pleasure! And... Thanks so much for the 5-stars! Hope you win!

Sometimes a contest winner may be given a cash option. A friend of
mine won a boat that was valued at $20,000. She opted to take a
$12,000 cash payment instead. Part of that went to taxes, of course.
But you can't send part of a boat to the IRS. The cash made things a
lot easier.