Rental with option to buy

[bgiez]

Do you treat a rental with option to buy as a rental, then deal with the sale if and when it happens, or do you do something else?

Standard boiler-plate rental agreement with handwritten addendum that states that the sales price of $79,900 will be reduced by a portion ($200) of the monthly rent payments to $77,500 if the renters decide to buy when the one year rental contract is up. Then there is a further unsigned addendum that states that the security deposit of $650 will also be applied toward the purchase, but no restatement of the reduced sales price.

The client originally tried to sell the inherited house but for whatever reason took this renter with the option to buy.

Thanks for any input.

[Koss]

Quagmire

That kind of contract is a minefield. One question that arises is what happens if the tenant does not exercise the option to buy. Depending on the language, they may or may not be entitled to a refund of some of the payments that were made toward the purchase. Usually there is no such refund. But depending on the wording, and on the subtleties of state law, it is possible.

The problem is this: Under state law, this type of contract could be construed as a land contract, or a contract for deed. The intent appears to be to give the tenant only the right to buy the property at a specific price, for a specific time period. If that's all it is, then there hasn't been a sale, or a conveyance, or a transfer of ownership.

But the application of part of the monthly payment toward the purchase could be interpreted to give the tenants an equitable ownership interest in the property right now. And if that is the case, then they may have already bought the property.

You might want to get an opinion from a real estate attorney.

BMK

[taxxcpa]

Rent with option

It goes to intent. If you rent with an option to buy at a cut-rate price at some future date, then it is a sale according to something I recall having read. If the option is to buy at current value, then it is a rental until the option is exercised.

[Burke]

This is covered in TTB. I just saw it yesterday looking for something else, but cannot tell you where it is at the moment. But it addressed just this situation, and it was referred to as "rent-with-option-to-buy."