Willow Glen Resident

Columns

Winning a free beach house could become a costly prize

By Dave Kehmeier

A $150 raffle ticket for a $1.5 million beach home in cozy Santa Cruz sounds like a doozy of a dream deal until you get a load of the bill.

After state, federal, property and transfer taxes, homeowners insurance and a few other sundry fees, there's a chance you can't afford to win.

Mt. Madonna School, a private college preparatory day school in Watsonville, is hoping to erase new construction debt by netting $2 million of the $4.8 million it hopes to raise from what could be considered the mother of all school fund raisers.

There are hundreds of cash prizes from $300 to $25,000, but the grand prize is a nearly-new, contemporary, two-story, 2,800-square-foot home on Oregon Street in Santa Cruz, just a three-block walk to the Pacific Ocean. The website MMSRaffle.com is devoted to the cause.

The home was donated for the luck-of-the-draw event by a private family that wishes to remain anonymous and the school says a real estate attorney advised it that the home is worth $1.8 million.

However, like many other housing markets in California, values aren't holding. The median price of single-family homes in Beach Boardwalk Town in August was $765,000 or about 2.3 percent less than the $783,000 median in August 2005, according to the Santa Cruz page of Bay Area Real Estate Market Newsletter published by Richard Calhoun, broker of Creekside Realty in San Jose.

Chances are the raffled home's value could come in closer to $1.5 million--the same amount as an optional cash grand prize the winner can choose instead of the home.

Anyway you look at it, winning $1.5 million on the June 2 drawing day won't be a walk on the beach.

* Sunnyvale certified public accountant Leonard W. Williams says a $1.5 million win--home or cash--will be considered ordinary income and boost you into the tax bracket of the stars--35 percent for Uncle Sam's take and 9.3 percent for California, for a total of 44.3 percent--for most of your winnings.

Considering just the $1.5 million win, graduated tax brackets from 2005 would have levied a 28 percent federal tax against an amount up to $326,450 and a 6 percent state tax against an amount up to $85,000. The rest is taxed at the higher rates.

Bottom line, the tax on the $1.5 million home or cash would amount to about a $502,000 federal stab and a state tax stake of $137,000, says Williams.

That's $640,000.

* While there are exemptions and exclusions to lower Santa Cruz property taxes and special levies to raise them, the starting rate is 1 percent per year, according to the Santa Cruz County Assessors Office.

Subtract another $15,000.

* Homeowner insurance companies and independent insurance agents refused to offer even a guesstimate on the cost of insuring the home without certain unavailable details, including past claims, the age of the homeowners, detailed structural information and more.

However, San Francisco-based A. Mason Blodgett obliged--with plenty of disclaimers. Blodgett is an attorney, managing broker for 12 insurance companies and an insurance forensic who has served as an expert witness on homeowner insurance matters.

Based on information he gleaned from the raffled home's online description, research of his underwriting database for Santa Cruz and some arbitrary assumptions, he estimated it would cost from $3,750 to $4,200 a year to insure the $1.5 million home with contents valued at, say, $700,000. The policy would include conventional fire coverage and $300,000 in liability protection, each with a $1,000 deductible. Raise the deductible for both to $5,000, he estimated, and the premium would drop to $2,750 to $3,200.

Make that a conservative $3,500 premium, based on an average of the four figures.

* Property transfer taxes, title and escrow fees, recording fees and other sundry transactional costs could conservatively cost another 1 percent of the home's value or about $15,000, according to a quick unscientific poll of several real estate agents.

Grand total in costs for winning the grand prize?

About $673,500.

"If the winner already has a house to sell, and wants this house, then selling the already-owned house might produce enough cash to pay the tax on winning this one," said Williams.

However, if the capital gains on the old house exceeds the $500,000 or $250,000 capital gains tax exclusion, taxes will be due on the excess.

"If the winner doesn't own a house to sell, and has few assets, then the winner will be better off to just take the $1.5 million cash, pay the tax, and buy a more modest home for cash," Williams suggested.

That's probably the best option. One other option will cost much more over time--finance the $673,500 using the grand prize as collateral.

At the going average rates for a $673,500 jumbo loan (6.22 percent for a fixed rate, 30-year loan and 5.82 percent for 5/1 hybrid fixed/ARM mortgage), the monthly principal and interest would be $4,133 a month for 30 years on the fixed loan and $4,007 a month for the first five years on the hybrid. The hybrid loan terms will determine how high the rate will go each year for the next 25 years.

Real estate writer Broderick Perkins, executive editor of San Jose-based DeadlineNews.Com, writes regularly for this newspaper.