Smart Reasons to Save, Use and Invest Money

The Catch With Winning A Free House

My friend that won the house ran into one problem with her great score!  

Big time taxes

Taxes!!!

The $200,000 that my friend won in the post “My friend won a house“, had the taxman at her door wanting his fair share!  

Luckily my friend “Sis” wasn’t making as much money as she does now.  But still the capital gains on $200,000 is quite substantial.  I’m not privy to the actual tax amount she paid, but from what I read it would have been taxed as if it were regular federal income tax rate, and then the state tax rates too…  So I’m sure it turned out to be a pretty penny, but not 50% like I’ve heard in the past.  

(Check out this funny and informational post by www.bargaineering.com: “Prize Winnings Tax” ) 

So how did she pay for the winnings?  

To start, she sold the new car that was part of the prize package (it was a hyundai).  Next she sold some of the gift certificates to friends.  She used some of the money that she had in savings, but I doubt that was enough either.  I’m guessing that she probably borrowed the rest from her parents.  I do know that she was pretty stressed out coming up with the money for the taxes.  

So I started wondering what would I do in her case?  

  • First, I’d have to liquidate all of my regular stock account holdings.
  • then I’d have to take a $50,000 loan against my 401(k).
  • I would expect that should do it, but if it didn’t, then I’d also take a home equity loan against the house I just won :(.

I guess in this case, every silver lining has it cloud.  😉  

But hey, it’s still good!

10 Responses to The Catch With Winning A Free House

  1. She wasn’t able to take out a loan against the value of the home? Any idea how long she had to pay the taxes after she won the house?

  2. Hello Ryan and welcome to my site!

    I don’t think she did that (although that’s what I would have done).

    As for how long she had to pay the taxes after she won the house, I’m not sure. The next time I see her (which isn’t often) I’ll ask her.

    I do remember her being stress out about the taxes. But honestly, I wasn’t thinking they would be as high as they were.

  3. I think I would have ran out and got an appraisal on the house for tax purposes. It may have saved her a ton. Then I would have taken out a HELOC to pay what needed to be paid. HELOC’s are cheep money right now, yea I know for how long?

  4. @Daddy Paul
    Good tips! Yeah, that get an appraisal sounds like a great idea!

    A HELOC (Home Equity Line of Credit) is what I would personally have done too.

    It’s still a great position to be in Taxes or no!!!

  5. Some TV show has a house giveaway in progress now. My wife keeps saying she is going to win and we are moving. I keep saying, “no way”, we are selling the house and she thinks I am crazy. She is getting a link to this post in her email tonight!

  6. LOL! My friend won her house from a radio station show. Surely, a TV Show would get many more participants! I still can’t believe she won it. I don’t think I personally know anyone else who has won such a big prize!

    Yeah, those taxes caused some real grief in the short term… Some major stress, for my friend! Especially considering she just got out of college.

  7. This was a good follow up post to your story. Of course, the taxes will always get you. I think I would have raided my savings and my parent, but since they don’t have any money then it would have been going online to prosper and borrowing it.