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.
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.
Answer :
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 business person. 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,....Read more..
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,....Read more..
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