Texas Lease Options

What is the worst case scenerio if you L/O your house to someone after Jan 1, 2006 in Texas? Possibly lose your option fee you collect upfront?


Texas legislation converts ALL residential home leases containing a purchase option into “executory contracts”. An executory contract is considered a sale under IRS tax rules, whereas a lease with option is not. This will result in DRASTIC adverse tax consequences to investors who cannot take advantage of long term capital gains rules.

Second, the bill requires that any seller of a property under an executory contract own property free and clear of all liens. There are many cases where this would be impractical, since creative financing is often a solution to a property that is difficult to sell. Restricting the means of sale is going to result in more foreclosures in Texas. It will also limit the options of many low-income buyers who have no other means of buying a home than on an executory contract from a seller.

The only means of owner financing left in the state of TX will be:

  1. Sell subject to an existing loan and taking a wrap (aka “All Inclusive Trust Deed” or “AITD”)

  2. Let the buyer assume your note and take back a second.

My suggestion: use a NARS landtrust. It is legal in 48 states including Texas, and does not trigger the DOSC. Good luck.


I have and have read the “meat” of Senate Bill 629.

Gary is only half right.

Senate Bill 629 does make a lease with option an “executory contract” which “entitles”, but does not require the buyer to “convert an interest in property under an executory contract into recorded, legal title.”.

Yes, Senate Bill 629 does require that any seller of a property under an executory contract own property [free and clear of all liens]. However, “A buyer could agree, before the contract was executed, to accept property that was not free and clear if the encumbrance on the property resulted from the seller obtaining a loan in the past to purchase the property.”.

My last note is this, all of the above “excludes a lease-option agreement if the contract was three years or less and the purchaser and seller had not been parties to an executory contract to purchase the property for longer than three years.”.

Now here is why the bill was created.

Closer to the Texas/Mexico border there were some investors that would get low-income families to sign a 5-10 year lease/option. Meaning that in 5-10 years the family could execute the option to purchase. When time was almost up, the investor would evict the family on questionable terms and re-lease the property.

The result is that the investor gets payments for 4-9 years and then does not have to sell the property. He/she/they only have to find new tenant/buyers.

This bill protects against the low-income families from being taken to the cleaners. It should not make it harder on investors unless they want to take advantage of people.

Lastly, if you would like my notes on Senate Bill 629 just email me at timeforplanb@gmail.com with Senate Bill 629 in the subject and I will get it to you.

Chris Bright
San Angelo, TEXAS