Q: What are the pros and cons of winning a home in a contest?

How much would it actually cost you in the long run, and are you better off taking the money or the home?

A: When you win a contest, it’s like winning the lottery. You get the goods but you have to pay tax on your winnings as personal income rather than capital gains. The difference can be pretty dramatic in terms of taxes owed.

For example, if you win a house valued at $200,000, and you decide to keep the house rather than taking a cash payment (if one is offered), you would have to declare the $200,000 value of the property as income in addition to your regular annual income. That would probably push you to the top tax bracket, which is currently 35 percent for federal income taxes plus whatever your state tax would be.

On $200,000 of income, you would then pay about $70,000 in taxes to the federal government plus state tax. While you may have deductions, you might also fall victim to the Alternative Minimum Tax (AMT). If you don’t happen to have $70,000 in cash, you could be in trouble with the IRS.

That’s why so many people decide to take the lump sum cash payment. At least this way, you have the cash to pay whatever taxes might be owed.

Published: Jun 24, 2005