Winning a Big Ticket Item: Tax Question

[Noah930]

Not that I have anything to worry about, but just curious. HGTV gives away a few homes each year. Right now they have a sweepstakes for a condo in Boston, for example, which got me thinking. Supposedly it's worth $1 mil. Yowza.

So for the person lucky enough to win something like this, what tax do they have to pay (up front) to collect their winnings? Is the winner effectively taxed for $1 mil in income? So they'd owe the federal and state governments about $450K in taxes in order to collect the keys to the place? How many people could cover a tab like that? I guess I can see why most would prefer a cash option to actually taking possession of said gift.

And then there are the annual property tax bill and monthly condo/bldg maintenance fees for this particular property that would likely run another $30-40K annually. Would be cool to have a little pad in the city, but yikes!

[Embraer]

i think that's exactly it. I do the SoCal Dreamhouse raffle thing every year for the Special Olympics. As I understand it...you're liable for the tax on the value of the prize. It's considered income.

Let's say you win a house that's valued at $4 million. Also, let's say they offer a cash prize instead...say it's 1.5 Million. You can take the house, and either pay the tax on $4 million worth of income, or you can try and sell the house before the year is up. If you sell the house for 3 Million, then you win out. If if you can't sell the house, you're liable for the taxes.

If you take the 1.5 million cash option, you just give your chunk to the govt.

[Embraer]

btw..i won in the raffle this year. an HD Camcorder. lol.

[TGTIW]

Unfortunately, yes there is a tax bill. They do however, have a standing agreement that the winner can sell the house/condo back to the developer.

[Gogar]

Remember the time Oprah gave everybody in the audience a car?

Winners of Oprah car give-away must pay up to $7,000 tax - Sep. 22, 2004


But yes, you will have to come up with the taxes unless they withhold taxes for the 'fair market vaule' for you, which I doubt they would do.

http://www.irs.gov/pub/irs-tege/notice_1340.pdf

[masraum]

I got laid off in 2001 when the stock market crashed. For a bit while I was looking for a job in my field, I worked at a game room that was attached to an enormous bingo hall (2 actually, 1 for morning bingo and another one for night bingo). Once a year, they had bingo that had a car as the grand prize. The cars weren't anything very nice, just very basic economy cars or I think a base model imported pick-up. I don't think anyone that won the cars actually took the cars. They required the taxes to be paid right away, or they had a cash option that was probably 1/4-1/3 the value of the vehicles. That's what everyone chose.

[timchar]

I've heard folks on shows like The Price is Right at times can't afford the prize after learning they have to pay taxes. My neighbor won an in ground pool from a radio station, when learned he had to pay taxes he said forget it. My dad just one a Polaris ATV, valued at 6 grand, he paid taxes and license. Uncle Sam always gets his. Tim

[GWN7]

So what is the tax rate the government charges? Lotto winnings up here are tax free (so far).

[Noah930]

At $1 mil USD, the federal gvt will take about 35%, and the state of MA will want another 5%.

But would the winner get taxed (at a state level) from his/her home state or from MA? CA for example taxes 9-10%. So would I have to pay CA income tax rate? Or the MA tax rate? Presuming I'd be living in CA and would only use the MA property as a vacation property. Would I have to cough up $400K or $450K?

[Gogar]

Originally Posted by GWN7

So what is the tax rate the government charges? Lotto winnings up here are tax free (so far).

Depends on what tax bracket you're in, or what new bracket the winnings 'income' kicks you up into. You know, for reasons of fairness.

[look 171]

Even if you had the money to pay the tax on it, turn around and sell it at fair market value. The IRS will get you again for that total capital gain, another 400K+.

Anyone know if we have to pay CA tax or MA, I am interested too.

[Por_sha911]

And as a double whammy, if you make 50K/yr and win one million, you pay the one million income tax rate on your 50k also.
Win a house? Get a mortgage to cover the income tax until you can sell it and you'll come out better than taking the 1/3 cash option (you would still have to pay income tax on the cash option).

[look 171]

Originally Posted by Por_sha911

And as a double whammy, if you make 50K/yr and win one million, you pay the one million income tax rate on your 50k also.
Win a house? Get a mortgage to cover the income tax until you can sell it and you'll come out better than taking the 1/3 cash option (you would still have to pay income tax on the cash option).

YOu do not come out better. Read my post. When and if you sell for 1 mil, you still have to pay the capital gain on that. There's is no deduction on it, so you get pop at max gain. The tax will be another 45k or more along with your regular income. Now you are out 90k so far. The more I think about it, I take the 1/3 and run off to Mexico to buy beach front property(ies) and hang out with the drug lords.

[timchar]

Originally Posted by GWN7

So what is the tax rate the government charges? Lotto winnings up here are tax free (so far).

In California anything over 600.00 is subject to federal tax. No state tax on lottery winnings.Tim

[PorscheA]

That sucks!!... for Americans...

In Canada you get to keep your winnings, no tax. And if you're a Canadian and you win in the US, you can fill out a W4? form and get your withheld money back. Cha ching.

[Por_sha911]

Capital gains is a tax on the profit made from selling an item higher than what you paid for it. If the house appraised at 2 mil and you pay tax on the 2 mil then when you sell it for 2 mil you had a net gain of ZERO. If you sell it for 1.75 mil (since most prizes are valued at full retail asking price) then you had a net loss and may even get to declare the loss on your taxes (disclaimer on this last part: I am not an accountant but I did sleep in a Holiday Inn).
I'll take 1.75 mil minus 700,000 -105,000 (RE fee) = 945,000 as opposed to 667k any day.

[PorscheA]

Oh YEAH! No capital gains on selling your primary property in Canada. Bought our house for 100K (pre-Boom) and sold it for 450K. All profit (no tax!).

[ossiblue]

Originally Posted by timchar

In California anything over 600.00 is subject to federal tax. No state tax on lottery winnings.Tim

Not exactly. California does not tax lottery winnings from the California Lottery, but it does tax winnings from lotteries held in other states. It is considered "miscellaneous income" and must be declared on your state returns. It's treated just like income earned from working in another state.

[biosurfer1]

a co-worker went on The Price is Right and ended up winning a bunch of stuff, about $32,000 and 2 cars. He didn't even take the cars because he said they needed tax payment right then and they basically handed you the keys right there and you have to deal with getting them home. Too much trouble I guess. I always thought they had to give you some sort of cash option instead of the car, but I guess not.

In all, he won something like $75,000 but after declining the cars and paying taxes on what he did win, he said he got roughly $22,000.

[GWN7]

So lotto winnings in the USA you pay state tax (based on where you live) and federal tax?

If you win big it would pay you to move to a state that has no personal income tax to collect? IE Powerball...