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Old 07-31-2013, 10:11 PM
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Rent-to-own sale

So, I started renting my former primary residence in 01/2012 after having it on the market for a year (moved to take a job elsewhere). In 04/2012 I purchased a home in my current city. I am sure you can understand why I might want to sell my former home.

Anyway, I currently have someone interested in a rent-to-own agreement on my rental property. I have not made any decisions concerning lease-option vs. lease-purchase; I need to speak to a lawyer. However, I would appreciate any feedback on the potential taxes associated with such a sale.

I purchased the home for $126,500 in 06/2006. I put about $20k in repairs into it while I was living there. The rent-to-own option I advertised online (which I expected no one to respond to) was $5k down, $1k per month rent, with option to buy within 3 years for $112,500. I will likely give them 10% of their rent toward purchase price.

I am currently renting the house for $900 per month, which is only $84 more than my mortgage...so at the end of the year, with upkeep and depreciation figured, I am at a $3.7k loss. I just received my real-estate tax statement that quotes the market value of the property at $144.5k ($28.9k for the land).

So my questions are:
1. What sort of taxes am I going to have to pay on this sale if we assume an agreement to begin in 01/2014, and the buyer purchases at the end of the three-year term (12/2017)?

2. What is the $5k down? Do I pay taxes on it immediately, or hold it as a deposit?

3. Is this a good idea, or should I keep renting until a conventional buyer comes along?

Like I said, I will make arrangement to consult a real-estate lawyer soon, but any info that I can get beforehand would be great.

Thanks in advance!



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Old 08-03-2013, 03:56 AM
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Join Date: Oct 2010
Posts: 5,236
Quote:
Originally Posted by zerokreap View Post
So, I started renting my former primary residence in 01/2012 after having it on the market for a year (moved to take a job elsewhere). In 04/2012 I purchased a home in my current city. I am sure you can understand why I might want to sell my former home.

Anyway, I currently have someone interested in a rent-to-own agreement on my rental property. I have not made any decisions concerning lease-option vs. lease-purchase; I need to speak to a lawyer. However, I would appreciate any feedback on the potential taxes associated with such a sale.

I purchased the home for $126,500 in 06/2006. I put about $20k in repairs into it while I was living there. The rent-to-own option I advertised online (which I expected no one to respond to) was $5k down, $1k per month rent, with option to buy within 3 years for $112,500. I will likely give them 10% of their rent toward purchase price.

I am currently renting the house for $900 per month, which is only $84 more than my mortgage...so at the end of the year, with upkeep and depreciation figured, I am at a $3.7k loss. I just received my real-estate tax statement that quotes the market value of the property at $144.5k ($28.9k for the land).

So my questions are:
1. What sort of taxes am I going to have to pay on this sale if we assume an agreement to begin in 01/2014, and the buyer purchases at the end of the three-year term (12/2017)?

2. What is the $5k down? Do I pay taxes on it immediately, or hold it as a deposit?

3. Is this a good idea, or should I keep renting until a conventional buyer comes along?

Like I said, I will make arrangement to consult a real-estate lawyer soon, but any info that I can get beforehand would be great.

Thanks in advance!
A lease option isn't for everybody. If you need all the money from the sale of your home right away, you're better off with a straight sale. In addition, the majority of lease options aren't exercised, so you may have to begin the process of selling your home all over again after the lease term. You might also think twice about a lease option if you don't want to, or aren't able to, keep up with the responsibilities of continuing to own the home. In the lease option scenario, the owner must continue to pay property taxes and insurance and is generally still responsible for major repairs during the lease term. A rent-to-own agreement should be handled with two separate documents: a lease and an option to purchase contract. The terms of both contracts are negotiable. The owner of a piece of property under a rent-to-own agreement retains the deed to the property while the tenant is still renting and has not yet exercised the purchase option. You , as an owner , get all the tax write-offs that go to homeowners. If you have to make repairs to the home for the tenant, the cost of those repairs is tax deductible. All expenses associated with renting out a property are tax write-offs, and you get the benefit of these deductions as a property owner and businessperson. Because you count the two to three years of payments from the tenant as rent, this is deducted from the selling price of the home. If and when the tenant buys the property, you, the seller, will show a lower purchase price for it. This will save on taxes because the selling price will be closer to the cost basis of the property. You, as a landlord, who offers a rental home through a rent-to-own deal often has a mortgage from purchasing the property. Prior to renting the home out, and throughout the option period, the landlord can take a mortgage interest deduction on your income taxes. This deduction is available to you on top of any mortgage interest deduction you take for another mortgage on the home you occupy. Once the tenant exercises the lease option and gets a mortgage to buy the home, he becomes the owner and gains rights to the mortgage interest tax deduction.you re also responsible for paying property tax until a new owner takes possession. This means that for the duration of the option period, you can take an income tax deduction equal to the value of property taxes. This same deduction will apply to the tenant once the tenant elects to exercise the lease option and purchases the home, thereby becoming responsible for its annual property taxes.
You need to make sure that if you will be requiring a Down payment from your "Buyer" that it is clearly marked as a non-refundable down payment. You can usually still deduct your mortgage interest payments from your income taxes during the term of the lease option. In general, you also do not need to pay any tax on the option money until the lease ends. At that point, you will need to include it in your capital gain from the sale of the house or, if the sale doesn't go through, report it as rental income. In most jurisdictions across the US, sales tax is not due upon signing a lease, even If you include an option to buy agreement. Although sales tax is not commonly applied on the purchase of real estate, especially owner-occupied residential real estate, other taxes will be due. These taxes may serve the same function as a sales tax, but they are labeled such things as city, county or state property taxes, transfer taxes, doc stamp fees or excise tax. These taxes are detailed on the HUD 1 statement issued prior to closing on a property.
A reputable real estate attorney can help you make sure a private rent-to-own deal is right for you as a seller. Making a rent-to-own deal with a private seller can be riskier than making a deal with a mortgage lender for a buyer. If the property value goes up during the lease period, you, the seller, may not want to let the property go. Having a solid deal put in place from the start can protect your buyer’s option.



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