The Tax Consequences of Winning a House

by Christopher Raines, Demand Media

    Winning a house or one of those home makeovers should be a dream come true. However, that dream comes with a cost. Winners of such huge prizes also get big bills for upkeep, utilities and, of course, taxes. The upfront taxes are hefty, and they're followed by a steady stream of tax bills. Those taxes can make it tough for winners of limited means to keep that dream home.

    Income Taxes

    If the home is worth more than $1 million when you win it, you'll be placed in the highest tax bracket possible. As of 2012, that was 35 percent. Before you take the keys, you must fork over one-fourth of the home's value to the Internal Revenue Service. That means a $1 million dollar home will immediately cost you $250,000. Unless you have the money in hand, you can either sell the house or take out a home equity loan to pay the taxes. If you sell, you'll pay taxes on the price. If you borrow against the house, you can deduct the interest if you itemize.

    Property Taxes

    You'll also get a property tax bill each year you own the home. Property taxes are charged by local governments based on the home's value, so you'll have to account for them each year. Some states do give some homeowners a break in this category. For example, Texas and Indiana allow its residents to lower the value that gets taxed; disabled persons may also get exemptions.

    Tax Deductions

    Paying state and local income and property taxes can ease the sticker shock on your prize. If you itemize, you can deduct these payments from your federal income taxes. However, you have to stay in the home to do that. If you can't afford to pay the income taxes upfront or get a loan to pay them, that could be hard to do.

    Home Makeover

    "Winners" of renovations from "Extreme Makeover: Home Edition" and similar programs also get hit with tax issues. All that work increases the value of the home, and the property taxes too. One winner in California saw his property tax bill more than double. Furthermore, the IRS has informally said owners owe income taxes on the improvements. To shield the owners from taxes, "Home Edition" "rented" the homes for less than 15 days, claiming that improvements during that time don't count as income to the "landlord" owners. The show paid "rent" by providing the furniture, electronics and appliances for the home. As of publication, the courts had not decided if "Home Edition's" tax-saving strategy could stick.

    About the Author

    Since May 2010, North Carolina lawyer Christopher Raines has been writing articles about legal topics, business, personal finance, taxes and careers. Raines holds business administration and law degrees from the University of North Carolina at Chapel Hill.