Every year, tens of thousands of people enter HGTV's Dream Home Sweepstakes, hoping to win a stunning home. A prize like that would be a dream come true. However, there's one thing that can turn that dream into a nightmare: Winning such a huge prize comes with an equally huge tax bill.
The Trouble with Big Sweepstakes Wins: How to Pay the Taxes
In the United States, sweepstakes prizes are taxed just like any other kind of income. Whether you make $30,000 working at your day job or you win a $30,000 vacation doesn't matter to the IRS, it's all taxed the same way.
This is no big deal if you win cash prizes and can simply deduct the taxes from your winnings; but with vacations and other prizes that are difficult to liquidate, you have to scrape up the money to pay the taxes.
The HGTV Dream Home prize is similar. If you win, you're hit with a heavy tax bill because the IRS treats you as if you had made an extra few million dollars of salary. And that's not all.
If you choose to keep the house, it comes with its own costs. You can expect to pay sizable property taxes every year, and just paying the heating, cooling, and other utility costs on a sprawling home can cost a lot of money.
However, those expenses don't mean that you should give up on trying to win the Dream Home. Even after paying their taxes, Dream Home winners come out way ahead, and here's how.
How to Handle the HGTV Dream Home's Taxes
Imagine that you've won this life-changing prize, and you're faced with a big tax bill plus the costs of maintaining the property. How can you handle that financial burden and still end up richer than before you won the prize?
One obvious way to help pay off the costs of winning is to put that beautiful home to work for you, for example, by renting it out. This was Don and Shelly Cruz's plan when they won the 2005 Dream Home in Tyler, Texas.
The 2005 Dream Home had several buildings on its property including a second, stand-alone house on the shores of Lake Tyler. The Cruz family intended to either sell the lake cottage or to turn the house into a bed and breakfast to generate income. But zoning regulations prevented either idea from working out.
So what did the Cruzes do? They put the Dream Home on the market to pay the bills.
And they're not alone. Every Dream Home winner so far has done the same thing with their windfall: they either sold it or accepted a cash option instead of taking possession of the home.
Now, after watching the HGTV special and dreaming of hosting a dinner party with that fabulous kitchen or going fishing on that stunning lake, you might not want to even think about selling the house.
But cashing out on the HGTV Dream Home prize is the easiest way of handling its taxes.
Is the Dream Home Sweepstakes Worth Entering If You Have to Sell the Prize?
It's disappointing to win an amazing home and not be able to live in it. However, being a Dream Home winner is, by itself, is an incredible, once-in-a-lifetime experience.
HGTV goes to great lengths to surprise the lucky winners, they treat them like royalty when they fly out to see the home, and they let the winners vacation in the house and enjoy all of its amenities.
Plus, even if they sell or take a cash option, the winners get to keep the designer furnishings and the cash and vehicle portions of the prize, which are substantial.
When Milton O'Bryant won the 2002 Dream Home he said, "It is almost magical the first time you get to tour the house. When we arrived in Annapolis, we were greeted by a wonderful staff that took care of all of our needs. You will eat the finest foods, visit the area's best attractions, and receive numerous gifts and keepsakes."
The HGTV Dream Home is a prestigious property that many people would love to own, meaning that it usually sells for a great price. Even after paying the taxes, smart winners have enough cash left over to live their dream, whether that be renovating their own home to make it perfect or buying a different, if somewhat less expensive, dream home.
It might be helpful to avoid thinking of the house itself as the prize and instead focus on the experience and the cash that winners walk away with.
In their article Is It Really a Dream Come True?, MSNBC quotes HGTV spokeswoman Emily Yarborough as saying: "Our vision of the dream is that it enables you to do what you want to do."
Enter the Dream Home Sweepstakes, but Don't Fixate on the House
If you won a giveaway where the prize was a million dollars cash, a vacation, appearances on television shows like Oprah, and a brand new car, you'd consider yourself very lucky indeed. However, some people call the HGTV Dream Home Sweepstakes a nightmare because of the tax burden.
The important thing about this sweepstakes is not to get fixated on keeping the home, but rather to enjoy the experience and the money and other great prizes that you will receive.
As Milton O'Bryant said: "I would have loved to keep it, but I was also terribly proud to sell it. It is a strange emotion... I am proud of this sweepstakes, and I want everyone to enter. It is a chance of a lifetime that everyone should risk. What happens after you win will be what you decide is best."
Other Ideas for Handling the Dream Home Taxes
In the past years, HGTV has often offered Dream Home winners two options: Take possession of the house or accept a large cash prize along with the other perks of winning (usually a vehicle, cash, furnishings, and artwork). Taking the cash option means that you would receive hundreds of thousands of dollars and won't even have to worry about finding a buyer for the house.
You may be able to whittle down the tax burden by donating part of the prize, like the vehicle or the artwork, to a worthwhile charity. Most charitable donations are tax-deductible, and this may help make the costs more affordable, especially combined with some of the other options.
The Dream Home Sweepstakes usually gives away a large cash prize along with the home and vehicle, and you can put this cash toward the taxes. You can also try to set up a payment plan with the IRS.
If you already have a home, you can try to sell that home or mortgage it to raise the money for the taxes. You can also try to take out a mortgage on the Dream Home.
The Most Important Thing to Do if You Win the HGTV Dream Home Sweepstakes
So what should you do if you are lucky enough to win the HGTV Dream Home? Sell, refinance, make a deal with the IRS, or something else altogether?
To decide what is right for you, you should get professional help. The very first thing that you should do if you win the Dream Home Sweepstakes, or any large sweepstakes or lottery prize, is to hire an experienced financial team to create a plan that will allow you to make the most of your windfall.
In the meantime, you can enter contests and sweepstakes to renovate your current home on a budget.