Paying Real Estate Taxes on a Rent-to-Own Purchase

With the weakening of the economy leaving many families fighting to keep abreast of mortgage payments, many sellers turn to rent-to-own options. Before the housing bubble burst in the late 2000s, when it was easier to get mortgages, sellers had many offers coming in and had no problem selling their homes. However, all of that went away when many subprime mortgage companies failed, making it much harder for low- to middle-income families to buy a house. Many sellers who had upgraded to a bigger home or moved their family for business purposes are saddled down with paying two mortgage payments because it is now hard to get their first home sold. The rent-to-own option makes it possible for sellers to have a set income coming in monthly that will help pay the mortgage on the first house. Because the home will ultimately be sold to the buyer at a later time, home ownership of rent-to-own homes can become confusing to some. We will address some issues such as paying real estate tax and home maintenance costs in this article.

How Does the Rent-to-Own Arrangement Work?

Rent-to-own homes are targeted at renters who might be looking to buy the home after living in it for a set period. Rent-to-own home offers attract buyers who are looking to buy a home but don’t qualify for the best mortgage rates because of credit problems or because they don’t have enough in savings to cover the 20 to 25 percent down payment to buy a house outright.

In a rent-to-own home contract, there is a set down payment in cash given to the seller and a set monthly “rent.” A part of this monthly payment will become credit towards buying the house at a later time, as set in the contract. The contract states the price of the home to be sold to the buyer at a set time. All credits and down payments given by the buyer during the duration of renting will be deducted from the final price.

After living in the home for a certain time, the buyer would have first choice in deciding whether to buy it before it goes back on the market. At the same time, the buyer is not obligated to buy the house at all. This option can be the golden point as to why many buyers would opt for the rent-to-own option in the first place.

Paying Taxes and Home Insurance

However, there are other minor details to consider in going this route. The buyer can be responsible for the maintenance of the house because, ultimately, he will be buying the house at a later time. However, until the final closing when the title is transferred into the buyer’s name, the house legally belongs to the seller, and the seller will report the rent as monthly income. Passive income is taxed at a lower rate by the government, and the seller will enjoy the savings in that area as well. Home insurance and real estate taxes are the responsibilities of the seller, not the buyer. When drawing up the contract between seller and buyer, the seller would be wise to calculate the rent with all of these details in mind. The seller cannot list home maintenance of a rent-to-own home as part of his deductions, however, because the buyer maintains the home.