The Housing Scene by Lew Sichelman

Win a ‘Dream’ House? Take the Money and Run

Congratulations to Beverly Fulkerson of Osgood, Indiana, who was the winner of a Montana mountain retreat in this year’s HGTV Dream Home Giveaway. Here’s hoping she gets to keep the place.

Fulkerson has been entering the HGTV promotion every year since 1998. This year, she entered almost every day. Her perseverance paid off when one of her entries was chosen from 135 million others, winning her a 3,650-square-foot house on the edge of Glacier National Park with stunning views of the Rocky Mountains and Whitefish Lake. The three-bedroom, 3 1/2-bath house is near a private entrance to the Big Mountain ski slopes.

But if history holds, Fulkerson and her husband won’t be able to hold on to the house. It’s not unusual for winners of contests like this to be forced to sell the properties because they can’t afford the income taxes, property taxes and upkeep. Even people who win makeovers of their current homes often must sell.

According to HGTV, only one of the first 10 Dream House winners has been able to hang on to their winnings. And just six of the first 21 winners -- there have been 23 contests so far -- actually lived in their new digs for more than a year.

The longest “survivor,” the 1998 winner, kept her dream home for eight years before selling it. But after taking out a mortgage on the place to pay her taxes, according to Country Living magazine, she used it only as a vacation property. (Country Living is published by Hearst, which also publishes HGTV Magazine.)

When it became obvious that the people winning its sweepstakes were unable to keep their new digs, HGTV began offering winners a cash option. Most winners now either go that route or sell the houses -- often back to their builders, but rarely at full value.

What’s the rub? Taxes, mostly. Since the winnings are considered income, Uncle Sam wants his cut -- as do the states in which these properties are located, and any other local jurisdictions with taxing authority.

If you’re lucky enough to win a house or renovation, you’ll be responsible for federal income taxes on the value of the property or improvements, plus state income tax, depending on your state of residence. You’ll pay taxes at the marginal rate, because the value of the prize is on top of any income you’ve earned from employment and investments.

Another problem: Most prize houses are located in areas with high costs of living. Compound that even further because property taxes, homeowners’ insurance, utilities and maintenance costs are recurring charges.

According to a breakdown by TurboTax for technology website Vocativ, the winner of a house worth $1.751 million would owe the IRS $693,300 in federal income taxes. Then there are state income taxes, which range all over the ballpark, and property taxes, which also vary from place to place.

However, if you take the cash option, which in this case is “just” $1.262 million, the feds would ding you for slightly less than $500,000. You’d also owe state income taxes, but there wouldn’t be any property taxes. Nice little windfall.

Most people can’t take the hit if they opt to keep the property, so they take the money -- more than $750,000, in the above example -- and run. That’s what the winner of the 2012 Dream Home in Midway, Utah, did; the home was later listed for $1.49 million, according to a detailed blog post by Laura Tedesco.

The 2011 winners tried to use their new Vermont ski-in, ski-out lodge as a vacation home, Tedesco reports, but only managed to use it five times before deciding to sell. The place sold for $2.7 million -- far below the $3.8 million HGTV said it was worth.

The sales taxes on the 2009 house in Sonoma, California, were $500,000, and the annual property taxes were $25,000. So the winner sold the place three months after she won it, for $2.2 million, and donated the contents of the home -- valued at $187,000 -- to charity. The buyer of the house was its builder, who marked it up 10 percent and resold it.

The 2008 winner would have had to pay sales taxes of roughly $700,000, plus $20,000 more annually for property taxes, so she sold her new Florida Keys house for $1.65 million. Just a few years later, the house was sold again -- for roughly half that amount.

The 2005 winner, Don Cruz of Chicago, ended up declaring bankruptcy; he couldn’t afford to keep the $2.5 million Texas mansion he won, though he made a herculean effort. He listed the place for $5.5 million, but after it went into foreclosure, it sold for $1.43 million.

The moral of this story is clear: Unless winners of these sweepstakes sell their current places and move, they probably can’t afford to take the hit. On the other hand, selling the prize house -- or taking the cash instead of the house from the start -- can result in a nice profit.