SANTA BARBARA, Calif. – The challenge of purchasing a home in the nation’s most expensive markets has bolstered nonprofits while enhancing the dreams of arts patrons and common consumers.
The Santa Barbara Contemporary Arts Forum has sold more than 14,000 tickets at $150 a pop in its Santa Barbara Million Dollar Home Raffle. The winner, to be announced Labor Day weekend, can choose between a 1927 Spanish-style home valued at $1.25 million or $1 million in cash. More than 180 cash prizes also will be offered, and no more than 18,000 tickets will be sold, according to event organizers.
The concept, approved by the California Attorney General’s Office, is modeled after a successful program held the past two years on the exclusive Palos Verdes Peninsula, a residential community southwest of Los Angeles.
The idea has intrigued professional fund-raisers around the country while lifting the hopes of potential home buyers priced out of rapidly appreciating markets.
Typically, a friend of the arts – often an elderly couple looking to downsize while helping the community at the same time – offers to sell a home to the nonprofit organization. The nonprofit buys the home with the raffle money and then awards the home to the winner once the money has been collected. If sales are slower than expected, the nonprofit usually splits all proceeds with the raffle winner. The elderly couple actually “donates” very little, often netting close to market value for the home. Rules can vary, depending upon the organization.
The Santa Barbara and Palos Verdes raffles have not experienced any problem hitting their desired financial plateaus – and quickly. Santa Barbara organizers reported ticket sales brought in $2.1 million in less than 60 days.
“Initially, our raffle was being supported by local central California people,” said Susan Goggin, publicist for the Santa Barbara Million Dollar Home Raffle. “As word spread, Los Angeles has now become our second-largest geographical area to enter for a chance to win a piece of the California coast. Santa Barbara real estate is limited and therefore desirable. This fund-raiser is a testament to how badly people want/need housing.”
The median home price in Santa Barbara leaped above $1 million this year. The median, or midpoint, means half the homes sold for more, half for less.
The raffle concept usually is more acceptable to state officials when a nonprofit is involved. For years, consumers have tried to market their own single-family homes via a raffle or similar contest, but most plans have a difficult time meeting legal guidelines. California now has a 60-page document outlining the requirements for nonprofit home raffles.
Other states are likely to require special rules as well. For example, according to the Washington State Gambling Commission, any activity that includes “prize, chance and consideration” is gambling and must be properly licensed and regulated. Typically, raffling off a house would be prohibited because it is based on chance. A lottery is similar. Some skill may be involved in choosing the numbers, but it’s mostly chance or luck.
The essay contest has been an alternative road to raffling off a home. (“For $250, state in 300 words or less why you want to live in Pleasant Valley.”)
The controversial step behind the essay contest is proving the contest was totally based on skill, not chance. Who are the judges? How were they chosen?
Another critical piece to the puzzle is the tax question. Would the Internal Revenue Service consider the house a “gift” and thereby taxable to the winner? A real-estate tax attorney said the gift question was definitely a gray area that would probably be up to a court to decide. If it were not a gift – if there was no gratuitous intent – then it would be taxable to the person receiving the home. It would be taxed as ordinary income.
Officials running the Santa Barbara and Palos Verdes events say the lucky winners most likely will face a huge tax burden – federal income taxes (possibly $350,000) and annual property taxes (possibly $16,000). But the tax consequences have not exactly curtailed sales.
According to Geof Wyatt, Santa Barbara Contemporary Arts Forum board president, the home raffle has raised “more money than we’ve raised collectively in the first 26 years of our existence.”
So, would you take the cash or the house? The two Palos Verdes winners have split – the first wanted the money while the second chose the house.
It sure would be nice to have a place here in Santa Barbara, if you could afford the property taxes.
Tom Kelly’s new book “How a Second Home Can Be Your Best Investment” (McGraw-Hill, $16.95) was co-written with John Tuccillo, former chief economist for the National Association of Realtors and is now available in local bookstores. He can be reached at news@tomkelly.com.
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