Essay winner receives home, and big tax bill

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— The fortunate essayist who wins half of a duplex here will certainly come out ahead, but not $499,800 ahead. The tax man will want his share of the prize.
A local couple, Michael and Mara O'Carroll, are sponsoring a 100-word essay contest and the author of the winning essay will be awarded the O'Carrolls' handsome stucco and rock home on Bear Drive.
The home reportedly appraised at $500,000.
The entry fee for the essay contest is $200. Mara O'Carroll has said that if she and her husband receive 2,200 entries at $200 apiece, it will make the contest worthwhile and net them enough return to part with their home. They plan to move to the southeastern portion of the country to be closer to family.
However, the winner of the essay contest will have to come up with more than $200 to own the home, local certified public accountant Kari Nelson said.
"It's like a lotto winning," Nelson said. "It's a prize for winning the essay contest. It's like Publishers Clearing House. If you win that million dollars, you owe taxes."
Another local CPA, Greg Henion of Wither, Tredway, Henion and Kerr, said the amount of tax the winner will pay depends upon his or her tax bracket and filing status. However, a tax bill in the mid-30 percent range is not unlikely.
A 30 percent tax bill on the house $500,000 less the $200 entry fee would translate to about $170,000.
Henion said he's aware of a court case in which a homeowner offered his house as a raffle prize to a nonprofit organization. The nonprofit sold tickets, and there was an arrangement to share the proceeds. But the raffle winner who claimed the house was found liable for the income tax bill, Henion said.
Jake Schutter, a commercial photographer from Detroit, said he is definitely planning to enter the essay contest and won't be deterred by the prospect of having to pay income taxes on the home. Schutter said his plan is to make the home a vacation haven for seriously ill cancer patients who have undertaken expensive treatments and cannot afford a vacation. Schutter said he believes his plan will form the basis of a winning essay.
O'Carroll said that she and her husband consulted seven attorneys to make certain their essay contest is legal and not affected by gambling laws. She said they did not formally research the tax implications for the winner of the contest but reached the conclusion that there were two possibilities: one, that the $200 entry fee would constitute the price of the house; and two, the possibility the winner would have to pay tax on the house.
Nelson said that assuming the winner is unable to pay off the tax debt in cash, if they are able to qualify for a mortgage equivalent to the amount of the tax bill, they should be able to hang onto the house. The value of the home would certainly secure the mortgage.
"You're still ahead," Nelson said. "It's just that you're not $500,000 ahead.
For information about the essay contest or to see the house, go online to www.steamboathomecontest.com

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