Lease Option: please give me suggestions on ways to take deposit from tenant.

Hello,

I am hoping to get some advice on my situation.

I have a tenant who has find a house (purchase price $300 K ) they want me to buy and they want lease for 3 years. After 3 years they will buy the house from me at 10% over the purchase price. They are willing to put down $50 k or give me $50 as security deposit. I need to figure out what is the best way to get this amount so that there is minimum to no impact on tax.

Now question is

  1. What is the best way to get $50 k from tenant so that I can use it towards the loan? if any.

  2. If I take $50 k as security deposit, is it taxable? Since deposit is not an income, I thought it may not be but want to confirm.

  3. What should I be aware of in this down housing market?

  4. What are the clauses I should have in contact to make sure I am protected?

I will really appreciate your tips or suggestions.

thanks
Raj

Raj, Do a Land Contract or Contract for Deed instead. If the property drops in value over 3 years then they may not want it. If they put 50K down and change their mind on the Lease Option they might want their money back and the judge might give it to them because they may have equitable interest in the property and the judge might consider it a sale. Dave T here can answer the tax questions rather well. My 2 cents worth. Herbster

Do a co-op assignment.

If the seller is motivated enough, see if they will do a lease-option. Bring them the tenant and take 1/2 or the whole 50k option fee. If the seller is willing to let you take that much… just another option.

Thank you Herbster for brainstorming and suggestion. If we get $50k as “option deposit” or “enrnest money” and write in “Lease with Option to Purchase” contract that if tenant default then the option deposit is non-refundable. Do tenant have right to get their deposit, in this case?

I am concern about “land contract” as, in case if tenant files for bankrupcy protection and they move-in into this house , their interest in house is now passed to their creditors. right?

Why “Contract for Deed” is better then “Lease with Option to Purchase” in this case? Will it protect me if tenant files for bankrupcy? I do not want to end up in situation where I am sharing a house with someone I can not vacate or sell the house.

thank you for advice…
Raj

If you can get $50K down, you will be sitting pretty well.

You do not want to take this as a security deposit, as they are taxable. We use the term “indemnification deposit”, and as I understand it we do not pay taxes on the money we hold. I would have to check with my CPA to be sure on that though.

If you are worried about the tax implications of taking the $50K all at once, I would think that there would be a way to set it up in some sort of escrow account with certain predetermined amounts being released at monthly intervals.

This makes sure the money is there, but isn’t quite as nice as having it all in hand.

You may want to check on the tax implications of calling it “principal”, and possibly using it to pay down the mortgage. There may be a benefit there.

If this money is called “option consideration”, it would be nonrefundable to the tenant buyer.

However, as I understand, it any time a tenant can get about 20% or greater equitable interest in a property, you are at risk of them legaly claiming ownership rights.