Lease Option Vs. Contract for Deed: Key Differences
Purchasing a home using with alternative finance methods is ideal for all types of people: those who cannot qualify for a home loan, those who do not wish to take out a home loan, and those who cannot afford to put down a large sum on the house in order to take out a loan etc. The time you’re given to budget and make payments can allow a person to buy a more expensive home than they could normally afford, or allow a person to buy a home at all. If you’re looking for a way to gradually buy a home, you may have come across two different buying techniques: the lease option and the contract for deed. Both of these real estate purchasing methods allow you to live in your home while you budget and make payments, but which option is right for you?
When you sign a lease option contract, you are signing a renter’s lease, and the landlord is signing you the right to purchase the rental property. The landlord cannot sell the home to anyone else while your lease is active. In most cases, the landlord will put the fixed total cost of the home in your contract, and it will be your responsibility to make payments toward the house and rent, paying off the house typically at the end of your lease when your contract expires. The lease option, however, gives you the option to purchase the home at the end of the lease. Legally you are in a landlord/tenant relationship and can choose not to buy the house at the end of your lease. The IRS doesn’t consider a lease option a sale until the home is paid off and the title is transferred to the buyer.
Contract for Deed
When you sign a contract for deed, you are agreeing to pay off the total cost of a house in gradual payments, typically monthly installments. While the buyer does not gain the title of the house while payments are being made, he gains equitable ownership of the home. This means he can do most of the things he could do if he owned the home, like live in it, rent it out, make repairs or paint it. However, he cannot take out a home equity loan. Because the IRS considers a contract for deed a sale, tax-wise the buyer is a homeowner, even if she doesn’t yet have the title. This means she may have to pay property tax, but she also gets more deductions and home-buying tax benefits. The seller must fill out IRS Form 6252 upon making the contract for deed agreement. If the buyer cannot pay off the full price of the home, the IRS treats it as a foreclosure and the seller reclaims the property.