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Lease to Own: The Basics
Rent-to Own Homes: How the Process Works (Investopedia, Feb. 22, 2022)
Rent-to-Own contracts have many important clauses that buyers need to be aware of. Depending on the contract, renters may be responsible for purchasing the house even if they can no longer afford it. Buyers also need to make sure they pay close attention to taxes, home maintenance, and how much principle will be applied to your future home.
The Basics of Lease Options and Purchase Sales (The Balance, Oct. 20, 2021)
“Owners of hard-to-sell properties commonly offer lease purchase agreements.4 They sell to a conventional buyer who would pay the seller cash if the property were a plum and easy to sell. Sellers generally get market value at today's prices and relief from coming out of pocket for the mortgage payment on a vacant property during the term.”
What is Lease to Own Property? (Millionacres, Feb. 5, 2021)
“Lease to own can be a beneficial method for buying and selling real estate. It gives a prospective buyer the right to purchase a property after renting it for a predefined period. A lease-to-own agreement allows a tenant to rent the property for a length of time with the option to buy at a predetermined price.”
Case Studies & Examples
Pathway Homes to Spend $750 Million in Rent-To-Own Venture (National Mortgage News, Feb. 3, 2022)
“The company’s rent-to-own options include HomeStart, which allows renters to move in after providing only a security deposit with an option to buy. Its Savings Match plan lets renters build toward a down payment, with Pathway Homes providing a fixed return and matching contribution over time. A third option to be available in the second quarter this year, Equity Builder, allows customers to buy half of their home with a 5% down payment while renting the remaining half.”
Withco Emerges from Stealth With $30 Million to Help Small Businesses Own Their Real Estate (Forbes, Feb. 1, 2022)
Withco, a real estate start-up founded by 31-year-old Kevin Song in 2019, helps small business owners own their stores via a lease-to-own method. Withcho actually purchases the properties that business owners are renting from other landlords and often developers, then places them on a “equity-building, lease-to-own” plan. This often allows the next generation of small “mom and pop” shops to take over.
Tax Information for Renting with the Option to Buy (SF Gate)
“The Internal Revenue Service recognizes two major classes of deduction for your home. As long as you itemize your deductions on Schedule A, you can write off your mortgage interest and your property taxes. However, lease payments aren't deductible, even if you have an option to buy the property. You may, however, be able to claim a renter's credit if your state offers one.”
Does a Rent-to-Own Option Have Tax Advantages? (The Nest)
“The renter doesn't get the usual tax breaks associated with home ownership: He can't deduct mortgage interest or claim any of the other tax breaks he'd get as a homeowner. Depending on your income and the state in which you live, however, you may be eligible for a renter's tax deduction. For example, in Massachusetts, renters can deduct up to $3,000. The owner of the rent-to-own arrangement, on the other hand, can deduct rental expenses -- repairs, maintenance, mortgage interest, travel to the house -- from the rental income the house brings in.”
Lease Option or Installment Sale? Determine the “Economic Realty” of Your Lease-Option Transaction or the IRS Will (Commercial Real Estate Institute)
There are many tax considerations both the owner and the renter need to make during a lease option situation – “If the IRS characterizes the lease option as an installment sale for income tax purposes, the ownership of the property is assumed to have been transferred at the time the tenant gave the landlord the option payment and the lease commenced. This timing alters the tax consequences considerably for both the tenant and the landlord.”
Government Publications & Programs
Lease/Purchase Program for State Agencies (Washington State Treasurer’s Office)
Lease Arrangements (United States Office of Energy Efficiency and Renewable Energy)
Leases with Purchase Options are Infrequently Used but May Provide Benefits (United States Government Accountability Office)
eBooks & Other Resources
The following eBooks and digital audiobooks are available to NAR members:
Smart Guide to Real Estate: Step by Step Rent to Own (eBook)
Investing in Rent-to-Own Property (eBook)
Investing in Real Estate With Lease Options and “Subject to” Deals (eBook)
Books, Videos, Research Reports & More
As a member benefit, the following resources and more are available for loan through the NAR Library. Items will be mailed directly to you or made available for pickup at the REALTOR® Building in Chicago.
Who Says You Can’t Buy a Home! HG 2040.5 R25w (2006)
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