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Tom Kelly
Tom Kelly
The Real Estate Adviser

May 29, 1998

Raffling a house is a chancy move

By TOM KELLY
The Real Estate Advisor

Most non-profit groups host some sort of fundraising event to defer costs, fund a new project or send an individual to a new challenge. In fact, in the spirit of primary education and scouting, I've probably pur chased more huge chocolate candy bars and cookies than most supermarket chains.

Another popular avenue, the ever-present raffle, also has been a traditional way of raising large sums of money quickly. The raffle, however, has been surrounded by scrutiny and skepticism -- even for good-intentioned non profits -- when used to sell a single-family home.

The subject surfaced again recently when the Ironstraw Group, a Port Townsend-based company hoping to "empower others to build affordable, environmentally sustainable homes through community based building" mounted a essay contest to sell a home and studio on six acres about four miles from the historic Jefferson County seaport.

It was billed as a "$225,000 home for $100." Entrants are asked to write why they would like to win and why "using alternative home building materials (such as compressed bales of straw) is important to our planet."

The idea is not uncommon. Several properties have been offered in recent years via contests, but most have been desperate, last-ditch attempts to market an overpriced, or terribly underbuilt, house. A non-profit fundraiser is definitely a admirable wrinkle (north Idaho college students hold an annual fundraiser by building a home with recycled materials) but unfortunately, the poor reputation of previous attempts clouds the process.

"I've never really seen one of the home raffles that has really worked," said Dave Horn, assistant attorney general in Washington state's Consumer Protection Division. "They are not illegal per se, but some of the sales and marketing methods have been illegal."

According to Horn, the state has taken action in the past 14 months against two people. One was a man who said the state endorsed his contest. The other was a Marysville woman who spent the funds promoting the event instead of putting them in a trust account.

"A recent movie seems to have brought a lot of these to the surface," Horn said. "They're just seems to be more of them out there now than there used to be."

The movie, "Spitfire Grill," is set in a small Maine town and stars Ellen Burstyn as the owner of the local cafe. She was getting on in years, tired of the early preparation that came with daily breakfast and concerned that the grill would never sell.

A friend suggests to Burstyn that she hold an essay contest with the grill as the one and only prize. Entrants would pay a fee to enter their essays.

Similar schemes have drawn interest from consumers -- and from the Washington State Gambling Commission and the Washington State Attorney General's Office. The gambling commission says any activity that includes "prize, chance and consideration" is gambling and must be properly licensed and regulated.

For example, 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 controversial step needed in order to recruit and persuade players to put up money is that the contest is totally based on skill (essay writing) not chance.

Another critical piece of the puzzle was 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 was 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.

To compound the tax question, "the seller" can leave himself open to other consequences, too.

If a gift, the donor would be liable for a gift tax. The basis of the house would not be stepped up to the value at the time it was received but for the value of the home at the time the donor got it.

And, if the donor considered it his principal residence -- if he did not hold it out a year with the intent of it being a rental -- there would be no tax deduction. According to the real-estate tax attorney, the only way that there would be a tax deduction for the donor as a principal residence would be if it was given to a charity -- perhaps a shelter for the homeless.

These uncertainties would tend to stop the average person trying to sell his home by holding an essay contest.

It usually turns out that a lot more potential buyers are interested -- and less suspicious -- when the house is listed with a competent broker and the home advertised the old-fashioned way.

Even if it's for a great cause.



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