The Tax Consequences of Winning a House
Winning the lottery or winning a big prize in a game show or raffle jackpot is a dream for many Americans. And thousands of lucky folks every year do win big prizes through various gambling activities and prize drawings. However, in almost all cases, whether it is a new car or a new house or $1 million in cash, these winnings are considered income, and the winners must pay income tax on the amounts won or the market value of the prizes. It is rare, but not unheard of, for the party awarding the prize to pay the taxes due as well, but not typical as the payer has to cough up 38.88 percent of the fair market value of the prize if it pays the withholding.
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IRS Regulations on Reporting Gambling Income
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IRS regulations are clear regarding gambling winnings. According to IRS Tax Topic 419 - Gambling Income and Losses, "Gambling income includes, but is not limited to, winnings from lotteries, raffles, horse races, and casinos. It includes cash winnings and also the fair market value of prizes such as cars and trips." This means that all gambling winnings, including real estate, must be declared as income.
Fair Market Value
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Note that the regulations above state the "fair market value" of prize winnings is treated as taxable income. Therefore, even if the company that held the raffle calls it a $200,000 house, if the fair market value is only $150,000, then you only have to report $150,000 in additional income. Fair market value is defined as the price that would be agreed to by a willing buyer and willing seller in possession of all facts and neither constrained by time. Determining the fair market value of a home will require the services of at least one professional appraiser who is familiar with the local real estate market.
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Selling Prizes to Pay Taxes
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Even selling prizes that you have won can be a bit tricky from a tax perspective. IRS regulations state you are responsible for paying income tax on the fair market value of the item. However, in the present example, you will be responsible for paying taxes on the fair market value regardless of how much you actually sell the house for. So it is generally unwise to accept the first low-ball offer on the home you just won to try and get cash out as soon as possible because you will still face a tax burden for the fair market value regardless of the price you sold it for.
Tax Withholding
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IRS regulations require payers to withhold taxes for certain gambling and other winnings. If you win at least $600 and more than 300 times the original amount wagered, then you must fill out a Form W-2G reporting the amount to the IRS before receiving the winnings. If you win more than $5,000, then you fill out form W-2G and the payer automatically withholds 28 percent in most cases. If you itemize your taxes, you can offset gambling income you have to report from any large wins to the extent of your gambling losses that year, as long as the losses can be documented.
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