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Raffle ticket could lead to $150,000 tax bill

January 27, 2008|By ARNOLD S. PLATOU

WASHINGTON COUNTY - Let's say you win the house.

Now, (deep breath here), you owe more than $150,000 in taxes.

This sobering news comes from an accounting firm based in Hagerstown and a Washington County official, who did an analysis for The Herald-Mail.

Nonetheless, paying $100 for a ticket in the ongoing San Mar Children's Home raffle for a $390,000 house still could be a pretty good investment, according to an official with Smith Elliott Kearns & Co. LLC.

"You've basically gotten $240,000 worth of house for nothing" if you deal with the tax load by getting a home-equity loan on it for $150,000, said Kristi Glass, a certified public accountant and tax manager for the accounting firm.

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"I mean, most people don't have that low a mortgage on their house. ... So as long as you can afford the payments on the home-equity loan," you're still a winner, Glass said.

Bruce Anderson, executive director of San Mar, has an alternative solution: You can sell the house.

"I'm saying even if the winner was to turn around and put it on the market for $300,000, they would have no problem at all selling it," Anderson said. "With all this publicity, there's any number of people interested."

The house, at 13607 Indian Springs Road near Big Pool, is the grand prize in a raffle that is to benefit San Mar Children's Home after paying for the house and other prizes. The raffle, which Maryland has approved, came about after homeowners Karen Crawford and Dennis Kelly were unable to sell it amid the ongoing housing crisis.

San Mar, which cares for 41 girls near Boonsboro, has agreed to buy the house for its appraised price of $390,000 if it sells at least 5,000 raffle tickets for $100 each. It then would reap at least $50,000.

If it doesn't sell that many tickets before March 13, when it plans to draw the winning tickets, or before its fallback date of May 15, the raffle would be canceled and $99 of every raffle ticket would be refunded. Thus far, just more than 1,000 tickets have been sold, Anderson said.

A taxing situation

At the newspaper's request, Glass agreed to figure how much the grand-prize winner might owe in Maryland and federal income taxes. She was told to assume that the winner's family is earning $61,800 - Washington County's average annual household income in 2007, according to a report by the county Economic Development Commission.

Glass' calculations assumed that the winner only would file for standard deductions. In addition, Glass made some assumptions as to how many exemptions there would be in a family filing its taxes in any of four domestic situations.

Based on her figures, a family earning $61,800 per year would owe between $9,815 and $13,974 in state and federal income taxes just based on salary. If that family won the house, then they would owe an additional:

· $154,687 if filing as a single. Here, there would, of course, be one exemption.

· $149,377 if in a married, filing jointly situation. Here, Glass assumed the exemptions would just be a husband and wife.

· $161,716 if in a married, filing separately situation. Here, she assumed there would be just one exemption.

· $153,026 if in a head of household situation. Here, Glass assumed the exemptions would be the head of household plus a dependent child.

If the winner walked into her office asking for advice on how to pay such a tax bill, Glass said she would advise obtaining a home-equity loan on the house.

"That's going to be their best bet," she said. "Most people with $61,800 in income aren't going to have $150,000 for tax."

Glass said with a home-equity loan, the winner could take a deduction on their income taxes as they paid off the loan.

"They could deduct mortgage interest on $100,000 of the home equity loan. The other ($50,000) would not be deductible interest" because of Internal Revenue Service rules, she said.

The IRS wouldn't allow a deduction based on the full $150,000 loan because "what they're trying to avoid is people going out and borrowing on their house to pay for everything under the sun, and then deducting it," she said.

The winner also apparently would have to pay closing costs - for the county recordation tax, and the state and county transfer taxes - when San Mar turned over the deed to the 3.2-acre property, according to county Clerk of the Court Dennis Weaver.

He said those taxes would total $6,614. The winner would have to pay half of that - $3,307 - and San Mar would pay the rest, according to a state official familiar with plans that the charity has made for the raffle.

By next summer, Weaver said, the winner also would be facing county and state property taxes. He said the assessment set on the house by the Maryland Department of Assessments and Taxation for the tax year beginning July 1 is $302,310.

If the county and state tax rates don't change, the property taxes would total $3,204.47 - of which $2,865.89 would be owed the county government and $338.58 would be owed the state.

San Mar's Anderson said people have asked him about the tax bills they might face if they won. He said the charity is planning to give the winner six weeks to decide how they might pay the taxes or whether they might want to sell the property.

Anderson said he's been telling people the taxes might total as much as $130,000.

"People then say to me, 'Oh, my goodness! One hundred and thirty thousand dollars?! Why would anybody do that?'

"And I'm saying, 'If you look at the bigger picture, if you want to sell the house, you'd have no problem in the world selling it. And then, they've been saying to me, 'Wow! OK! That's a pretty good deal.'"

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