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Lease to purchase on a rental, info needed
Posted on 3/29/21 at 8:04 pm
Posted on 3/29/21 at 8:04 pm
So now that I have that renter out, I have a guy who is interested in a lease- purchase option. Here are the details. If I were to sell it outright, I would need to pay taxes on it correct? I was told 20% of the net profit on what I paid for it. Paid cash for it about 25 years ago. It’s doubled in value. How does the lease purchase avenue work? A down payment of some sort to start with I assume
5
Posted on 3/29/21 at 11:55 pm to JBM210
The depreciation you took would be ordinary income.
Posted on 3/30/21 at 4:09 am to JBM210
I would make sure to cover all the bases on a lease option because there are a ton of different ways to structure the deal. I have looked into something similar and was advised to do a bond for deed. Make sure they put down an adequate amount of payment upfront to give you leverage in the deal. If I were to go that route I would probably have the contract looked over by a lawyer and consider having it maintained by a loan administrator (at the cost of the buyer), so there would not be any arguments/confusion over when payments were made or not. Also, if you had the loan serviced they will escrow property taxes and home owners insurance from the note to make sure that the buyers are maintaining insurance on the property. It’s been a while since I did the research on this so I hope everything I have told you is accurate.
As far as the tax implications of it, I can’t help you much there. It depends on your cost basis and depreciation schedules. I have a CPA keep track of all that.
As far as the tax implications of it, I can’t help you much there. It depends on your cost basis and depreciation schedules. I have a CPA keep track of all that.
Posted on 3/30/21 at 5:35 am to JBM210
Was this once your primary residence?
Posted on 3/30/21 at 6:50 am to Dawgfanman
90% of lease purchases turn into a rental. You just went through the mess to get those other people out. You should have no trouble selling a house right now.
Posted on 3/30/21 at 8:26 am to LSU1018
Exactly, I have someone I did this with 6 months ago before the market got super hot and he could not get it refinanced into his name because he doesn't have enough cash 
sooo I have to let him stay in it for another 5 months and then hope if he can't refi into his name that he keeps it in good condition when he hands it back.
The ONLY reason I did it is because they were both military people who are a friend of a friend and vouched for and the market was total crap at the time.
I WOULD NOT do this, the market is HOT, even if you took 10k less, sell the house outright, just like above stated, it will just be another renter with more complications.
sooo I have to let him stay in it for another 5 months and then hope if he can't refi into his name that he keeps it in good condition when he hands it back. The ONLY reason I did it is because they were both military people who are a friend of a friend and vouched for and the market was total crap at the time.
I WOULD NOT do this, the market is HOT, even if you took 10k less, sell the house outright, just like above stated, it will just be another renter with more complications.
Posted on 3/30/21 at 8:54 am to PistolPete45
Yes this was my primary residence back 15 years ago
Posted on 3/30/21 at 10:03 am to JBM210
As said, why do this now? The only reason to lease-purchase is because you can't get traditional financing. In other words, he's not a good candidate to buy this. The only reason to do it as a seller is because you can make more money on it then renting and often times the tenant is responsible for the maintenance. The caveat though is that the tenant is responsible for the maintenance, and that's only good if they actually do it. If you have to boot them and then have a maintenance nightmare, its not a great situation.
If you want to sell, I'd list it on the open market.
If you want to rent, fine to.
I personally wouldn't deal with a lease-purchase right now but that doesn't mean you shouldn't.
If you want to sell, I'd list it on the open market.
If you want to rent, fine to.
I personally wouldn't deal with a lease-purchase right now but that doesn't mean you shouldn't.
Posted on 3/30/21 at 10:22 am to baldona
I’m about 95% leaning towards selling outright. However, I’m hearing conflicting info on taxes paid by me when I sell. There should be around a $80,000 profit made from what I paid for it and what I should get for it. One person tells me I would only have to pay taxes if there is over $500,000 or higher profit made. Another tells me that I would have to pay 20% of that $80,000 in taxes.
Posted on 3/30/21 at 10:55 am to JBM210
From what I know, you have to pay taxes on it unless the home was your primary residence for 2 out of the last 5 years. The person telling you that you don’t have to pay if it is less that 500k would be correct if this home was your primary residence. From what I can tell the tax rate will be either 15% or 20% depending on your situation. The amount you pay taxes on is not simply what you sell it for minus what you paid for it. You are able to add money spent on maintenance, structural upgrades, depreciation, etc which will determine what your actual cost basis is on the property. It’s probably best to pay a CPA to do your taxes to make sure you pay the correct amount in taxes. You might want to speak with them before selling the property to see if there is somewhere that you can place the proceeds to avoid or defer the capital gains.
Calculating cost basis of a home
Calculating cost basis of a home
This post was edited on 3/30/21 at 11:01 am
Posted on 3/30/21 at 10:56 am to JBM210
A lease purchase is not a sale until the purchase occurs. You would still rent the house out and follow all tax protocols for that. Usually an extra amount every month is paid and that goes into escrow to fund a down payment. Then when the purchase actually occurs... that's when you report the sale.
If you last lived in it 15 years ago, you won't get any exclusion.
Your gain is:
Purchase price
Less commissions
Less cost basis
Your cost basis is what you paid for it, plus any improvements not expensed, less depreciation taken, or should have been taken.
Example: Paid 100K for it, 20K improvements, 50K depreciation taken, sold for 200K, 14K closing costs
200K
Less 14K
Less 70K (100K + 20K - 50K )
Total Gain - 116K
Your depreciation recapture (in your case 50K) will be taxed at the lower of your marginal tax rate or 25%.
The balance would be taxed as a long term capital gain.
Long term capital gain rates depend on your other income. You may also be subject to net investment income tax.
Then, if you live in a state with state income tax, you have that as well.
If you last lived in it 15 years ago, you won't get any exclusion.
Your gain is:
Purchase price
Less commissions
Less cost basis
Your cost basis is what you paid for it, plus any improvements not expensed, less depreciation taken, or should have been taken.
Example: Paid 100K for it, 20K improvements, 50K depreciation taken, sold for 200K, 14K closing costs
200K
Less 14K
Less 70K (100K + 20K - 50K )
Total Gain - 116K
Your depreciation recapture (in your case 50K) will be taxed at the lower of your marginal tax rate or 25%.
The balance would be taxed as a long term capital gain.
Long term capital gain rates depend on your other income. You may also be subject to net investment income tax.
Then, if you live in a state with state income tax, you have that as well.
This post was edited on 3/30/21 at 10:57 am
Posted on 3/30/21 at 11:02 am to JBM210
quote:
Yes this was my primary residence back 15 years ago
I think the basis for your taxes in any sale would start at that date (when you rented it out to someone), not your original purchase.
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