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The challenge of purchasing a home in one of the nation’s most expensive markets-Santa Barbara, California-has bolstered non-profits fundraising efforts while boosting the dreams of arts patrons and common consumers.

A family member recently sent me this story about an upscale home raffle. The raffle topic, however, has been attempted in a variety of situations ranging from desperate to well . . . this one.

The Santa Barbara Contemporary Arts Forum (SBCAF) has sold more than 14,000 tickets at $150 a pop in its Santa Barbara Million Dollar Home Raffle. The winner 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 State Attorney General’s office, is modeled after a successful program held the past two years on the exclusive Palos Verdes Peninsula near Los Angeles. The idea has intrigued professional fundraisers around the country while lifting the hopes of potential homebuyers 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 their home to the non-profit organization. The non profit (in this case SBCAF) buys the home with the raffle money and then awards the home to a winner once the money has been collected. If sales are slower than expected, the non-profit 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 fewer than 60 days.

A publicist for the Santa Barbara Million Dollar Home Raffle said that Los Angeles, a two-hour drive south of Santa Barbara, has become the second largest geographical area for people entering the contest to win a piece of the California coast.

The raffle concept usually is more acceptable to state officials when a non-profit 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 non-profit 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. But the questions arise: 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 tax (possibly $350,000) and annual property tax (possibly $16,000). But the tax consequences have not exactly curtailed sales.

According to the Santa Barbara Contemporary Arts Forum board, the home raffle has raised more money than the organization has raised collectively in its first 26 years of 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.
A home on the California coast might be wonderful. But how can I could afford the property taxes?

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