Ronald McDonald house 2014

User Forum Topic
Submitted by rasaid111 on January 13, 2014 - 4:42pm

Could someone answer my question please?
if you win the 4,000,000 Ronald McDonald house, what of the following options could you choose and why?

1.- Receive the cash for only $1,400,000
2.- Receive $2,100,000 through 20 years $8,750.00 monthly
3.- If you have enough money to pay everything, title, taxes, etc. then try to sell the house a better price, how much money do you think that could you receive for this house?
Thanks for your response

Submitted by Coronita on January 13, 2014 - 4:46pm.

lol...... This is a joke, right?

Submitted by scaredyclassic on January 13, 2014 - 4:48pm.

I think you can also opt for 1.9 million in burgers and fries.

Submitted by Coronita on January 13, 2014 - 4:59pm.

6packscaredy wrote:
I think you can also opt for 1.9 million in burgers and fries.

Not in NYC... I think super size drinks are banned (still)....

Submitted by spdrun on January 13, 2014 - 6:12pm.

^^^

LOL, no... that was struck down by a court ages ago.

Getting back on topic, I'd take the lump-sum cash as follows.

Say $950,000 after taxes, invested in rental property at 7% = $66,500/yr = $5,541/mo. If it's in rental property, deductions ensure a lower tax rate than that on the $8,750/mo, and my return (rents) will likely go up over time, plus it will last longer than 20 years. Seems like a better deal than the 20-year payout, especially since the payor could go bankrupt five years from now and I'd be left with bupkiss.

I may consider taking the house IF it's actually worth $4 million other than on paper and if I can get a hard-money loan to cover my up-front expenses before I am able to sell it.

I'm not greedy, but I'd always prefer cash in hand as soon as possible to invest as *I* please, rather than as whatever entity's funds manager pleases. I'd sure he's a good guy, but I probably don't know him personally :)

Submitted by UCGal on January 14, 2014 - 3:23pm.

My gut instinct is take the cash.

But I always try to make the comparables more apple to apple.

If I were to buy an income annuity for 20 year period certain (in other words - it pays for 20 years, not a month more or less - benificiaries get it if you die sooner.)
An annuity that pays $8750/month for 20 years would cost you: 1,558,361. (This is from immediateannuities.com plugging in single male age 40).

Then you have to look at taxes. If you take the lump sum, and pay taxes on it - it's mostly taxed at the maximum bracket. So you have a one time huge hit. If you take the annuity - that's $105k/year - which means a much smaller portion of the money is taxed at the high rate. (Especially if you quit your job).

So... after doing the math - I'd do the annuity, and invest it in index funds. (And push my retirement sooner.)

Submitted by FormerSanDiegan on January 14, 2014 - 4:09pm.

14296 Dalia Dr, SOLANA BEACH, CA 92075

Zillow thinks it's worth $4+ mil

Submitted by an on January 14, 2014 - 5:18pm.

I'd take the house if it's truly a $4M house, assuming that I can sell it for $4M. I would then sell it, pay the taxes, and invest the $1.9M. I can never see myself living in a 7k+ sq-ft house. I rather live in a small house w/ panoramic ocean view than a ginormous house w/out ocean view.

Do you have to pay the tax on day 1 or do you pay it at tax day? What happen if you don't pay the tax right away? How much penalty do you incur?

Submitted by spdrun on January 14, 2014 - 5:45pm.

You'd likely have to make an appropriate estimated tax payment for the quarter that you won the prize.

If you do that late, you'll likely be charged ~3% per annum interest rate until you do. TSOR says that money only gets withheld up front in case of a cash prize.

Thus if you can sell within 6 mos to a year, there's likely some wiggle room.

Submitted by an on January 14, 2014 - 5:58pm.

spdrun wrote:
You'd likely have to make an appropriate estimated tax payment for the quarter that you won the prize.

If you do that late, you'll likely be charged ~3% per annum interest rate until you do. TSOR says that money only gets withheld up front in case of a cash prize.

Thus if you can sell within 6 mos to a year, there's likely some wiggle room.

Then, wouldn't it be cheaper to "borrow" from the IRS than hard money? 3% beats 10%+. I'd totally get the house and sell it. Then pay the taxes from the proceed of the sell. Even if it takes >1 year (that just mean you're not pricing it right and price of the house isn't really $4M), it's still worth it to just "borrow" from the IRS than anyone else.

Submitted by joec on January 14, 2014 - 7:08pm.

This is not tax advice for anyone's situation so consult your tax adviser first...

The 3% varies based on what interest rates are currently...Obviously, if you have other debt higher than 3%, you might want to consider it, but you can't deduct underpayment penalties like student loans or mortgage debt or business debt...A business might just get other loans and just deduct it against income which maybe better to overall minimize taxes.

I'm not sure if taking the annuity is better. Remember that after 20 years, that 104k is no where near what it is today. You also have to look at how much income a lump sum can generate vs. an annuity of 100k per year vs. taking say 1.2 mil after taxes.

It's probably overall the same, but with the cost of money and inflation and lack of control, I think people who can manage their finances are probably better off taking the lump sum.

Submitted by moneymaker on January 14, 2014 - 10:18pm.

House just lost $104,000 in the last 30 days according to Zillow. Is there an HOA there? That might be a deciding factor for me, and if so how much is it? Seems like a relatively small lot for the area, is the old owner going to build another house right behind it?

Submitted by rasaid111 on January 14, 2014 - 10:21pm.

Where did you find the address?

Thank you

Submitted by rasaid111 on January 14, 2014 - 10:38pm.

If I understand your response, I don't need to pay taxes immediately, I can wait to sell the house and pay the taxes and 3% interest. right?

For you how much money could you receive after all expenses if you sell the house for $3.5 instead 4
Thanks again

Submitted by an on January 15, 2014 - 2:10am.

rasaid111 wrote:
If I understand your response, I don't need to pay taxes immediately, I can wait to sell the house and pay the taxes and 3% interest. right?

For you how much money could you receive after all expenses if you sell the house for $3.5 instead 4
Thanks again

Take $3.5M, then subtract ~53% for taxes. You can then round down to the nearest hundred thousand to for fees/penalties/etc. I'm guessing $1.5-1.6M? If you invest $1.5M lump sum in a long term CD making say 3% over 20 years, you'll have ~$2.7M after 20 years. That sounds better than $2.1M if you take the monthly cash payment. Increase that rate to just 4% gets you $3.2M after 20 years. Still very conservative estimate for a 20 years average, IMHO. Considering ~7-8 years ago, you can find CDs in the 6-7% range.

Submitted by spdrun on January 15, 2014 - 8:50am.

Or you buy $1.5 MM of condos that rent at 6% cap and have $90k/yr income. Increasing with inflation, with healthy tax deductions :)

Removes the temptation to touch the principal.

Submitted by an on January 15, 2014 - 10:57am.

spdrun wrote:
Or you buy $1.5 MM of condos that rent at 6% cap and have $90k/yr income. Increasing with inflation, with healthy tax deductions :)

Removes the temptation to touch the principal.

Or buy $1.5M of SFR in areas like Fresno, CA or TX that make 8-12% cap rate and hire a good property manager to maintain that portfolio. There are a lot of options out there. I only brought up 3-4% as an extra conservative option and still get you ahead of taking the monthly cash payment.

Submitted by spdrun on January 15, 2014 - 11:08am.

Stuff that caps out at 6% is usually middle to high-end, meaning that it's easy to keep rented with minimal heartache. It's also in areas that you'd actually want to live, unlike Fresno or Texas.

And a lot of mx that you'd need a property manager for is taken care of by the condo management company.

Submitted by an on January 15, 2014 - 11:25am.

spdrun wrote:
Stuff that caps out at 6% is usually middle to high-end, meaning that it's easy to keep rented with minimal heartache. It's also in areas that you'd actually want to live, unlike Fresno or Texas.

And a lot of mx that you'd need a property manager for is taken care of by the condo management company.

As the saying goes, higher risk, higher return. Also, just because it's low end doesn't mean it's always a big heartache. I know people who have rentals in Fresno and one of their property, their renter has been in there for over 10 years and the other ones have renters in there for 3+ years so far. Those are life long renters who are on welfare.

Submitted by spdrun on January 15, 2014 - 12:09pm.

If I were given $1.5MM, I'd be interested in having it pay me a reasonable dividend, not maximizing return at the expense of higher risk. 6 or 7% is high enough if it can pay reliably.

Submitted by rasaid111 on January 15, 2014 - 4:53pm.

Thanks alot for your response, the last question for you, If I understand everything that you wrote, the best decisión is to keep the house instead the other options.
right?
What Will happen If I decide to live in the house For 2 years before I sell it, I heard that you pay less taxes.

What do you recommend.

Thanks again you have been very helpful for me.

Submitted by SK in CV on January 15, 2014 - 6:21pm.

AN wrote:
Take $3.5M, then subtract ~53% for taxes. You can then round down to the nearest hundred thousand to for fees/penalties/etc. I'm guessing $1.5-1.6M? If you invest $1.5M lump sum in a long term CD making say 3% over 20 years, you'll have ~$2.7M after 20 years. That sounds better than $2.1M if you take the monthly cash payment. Increase that rate to just 4% gets you $3.2M after 20 years. Still very conservative estimate for a 20 years average, IMHO. Considering ~7-8 years ago, you can find CDs in the 6-7% range.

Hate to quibble over a few percentage points, but on 3.5 million, 1% is a lot of money. It wont be 53%. Probably no more than high 40's.

And more likely than not, no significant income taxes would be due until April 15th next year. There are safe harbors that would eliminate the need to pay huge quarterly estimates this year.

Submitted by an on January 15, 2014 - 6:44pm.

SK in CV wrote:
Hate to quibble over a few percentage points, but on 3.5 million, 1% is a lot of money. It wont be 53%. Probably no more than high 40's.

And more likely than not, no significant income taxes would be due until April 15th next year. There are safe harbors that would eliminate the need to pay huge quarterly estimates this year.

Based on http://www.moneychimp.com/features/tax_b... and $4M (not $3.5M since, that's the value the house is supposed to be at), federal tax would be 38.54%. State income tax is 11.644%, based on https://webapp.ftb.ca.gov/taxcalc/calcul.... So, combined, it's ~50%. less than the ~53% I gave a rough estimated but higher than high 40's you stated. Of course, it depends on what else you're deducting. 3% less = $120k for $4M. Not chump change for most, but it still wouldn't change my general point. Also, obviously, if you really were the winner, you'd get yourself a good tax advisor and not trust some vague estimate from some anonymous person on Pigg.

Submitted by spdrun on January 15, 2014 - 6:54pm.

Quibble: Assuming you were a full year tardy, you'd pay the 3% on the 50% tax (assuming the state rate is similar) NOT the full value of the house. So the penalty hit would be $60,000, not $120,000.

Submitted by spdrun on January 15, 2014 - 6:57pm.

What Will happen If I decide to live in the house For 2 years before I sell it, I heard that you pay less taxes.

You'd only pay less taxes on any gain above $4 million. Tax on the $4 million would still be due April 15 of the following year at latest.

If you can figure out a way to swing the income tax as well as the property taxes/expenses, why not? Just remember, property values are volatile. It could be worth $5 million in two years, or it could be worth $3 million.

I'd personally sell ASAP and put the money into more ... manageable ... homes, but that's just me.

Submitted by SK in CV on January 15, 2014 - 7:06pm.

AN wrote:
SK in CV wrote:
Hate to quibble over a few percentage points, but on 3.5 million, 1% is a lot of money. It wont be 53%. Probably no more than high 40's.

And more likely than not, no significant income taxes would be due until April 15th next year. There are safe harbors that would eliminate the need to pay huge quarterly estimates this year.

Based on http://www.moneychimp.com/features/tax_b... and $4M (not $3.5M since, that's the value the house is supposed to be at), federal tax would be 38.54%. State income tax is 11.644%, based on https://webapp.ftb.ca.gov/taxcalc/calcul.... So, combined, it's ~50%. less than the ~53% I gave a rough estimated but higher than high 40's you stated. Of course, it depends on what else you're deducting. 3% less = $120k for $4M. Not chump change for most, but it still wouldn't change my general point. Also, obviously, if you really were the winner, you'd get yourself a good tax advisor and not trust some vague estimate from some anonymous person on Pigg.

That was pretty much the same as my calculation except that the state taxes are deductible. Pay 350K, about $240K of that will be deductible, saving another $100K or 2.5 to 3%. (to preempt a likely criticism, whoever wins is unlikely to be subject to alt-min tax.)

Submitted by SK in CV on January 15, 2014 - 7:07pm.

spdrun wrote:
Quibble: Assuming you were a full year tardy, you'd pay the 3% on the 50% tax (assuming the state rate is similar) NOT the full value of the house. So the penalty hit would be $60,000, not $120,000.

I'm not sure what you mean by tardy. If I win the house today, I don't owe anything substantially different than I otherwise would have owed, until 4/15 of next year. And there will be no penalties.

Submitted by joec on January 15, 2014 - 7:08pm.

I agree that if you win, you should hire someone to at least run some numbers or double check your work, even if you are an expert on tax...

Everyone also has a different situation so if you have an awesome pension or double retirement (retired military), working another job now with another pension, then maybe income is already very high in retirement, etc...

These are all good problems to have if you win! Only(!) $150 per ticket....

I'm sticking to my money down the toilet lotto.

Submitted by joec on January 15, 2014 - 7:09pm.

SK in CV wrote:
spdrun wrote:
Quibble: Assuming you were a full year tardy, you'd pay the 3% on the 50% tax (assuming the state rate is similar) NOT the full value of the house. So the penalty hit would be $60,000, not $120,000.

I'm not sure what you mean by tardy. If I win the house today, I don't owe anything substantially different than I otherwise would have owed, until 4/15 of next year. And there will be no penalties.

I think you're supposed to pay estimated tax...That's where the penalty is from.

Submitted by spdrun on January 15, 2014 - 7:12pm.

It seems as if you pay at least 110% of last year's tax due, you're OK. I thought there would be some sort of upper income cap on this provision, but apparently there is not.

Submitted by SK in CV on January 15, 2014 - 7:15pm.

joec wrote:
I think you're supposed to pay estimated tax...That's where the penalty is from.

There's a safe harbor for penalties. Depending on prior year's income, there's no penalty if you have between 100 and 120% of prior year's tax paid in. If prior year tax was $100K, if you have $120K paid in through withholding or equal quarterly estimates, no penalty.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.