Tenant interested in lease option

[Lisa Green]

A tenant in one of my single-family homes has asked whether I'm interested in selling and whether I'd consider doing a lease purchase option on the house.

I have no strong feelings about this one way or another, but I'd like to get your collective wisdom before responding to her. I've never tried selling on lease-option or lease-purchase before.

[Bill Gulley]

In 2016, option contracts over 12 months in a term take on new stripes. You're looking at new accounting requirements that effects the tax treatment and a determination by the IRS as to an option being an installment sale.

While an option does not transfer an equitable interest in the property the buyer (optionee) acquires an equitable interest in the contract. The value of that interest is derived from the value of the real estate. The courts generally view an option in this manner and assume the option is to be taken unless intent is specifically stated otherwise. This then leads to what John mentioned, assuming the option is to be taken and having possession of the property leads to foreclosure proceedings under state law. If an optionee acquires 10% in equity or a contract or more, they are then considered a buyer under an installment sale.

As a landlord the exemptions from Dodd-Frank consumer lending rules do not apply as a homeowner selling their own residence. There is an exemption available to those selling one property within 12 months, but there are still loan requirements, including no balloon payment being required until half of the principal has been paid over an amortized period. Even if you have this exemption you're still responsible for the loan originated being in compliance so it's best to see a licensed mortgage originator. Attorneys usually aren't mortgage originators, but one may be.

Today, while compliance has changed, options are still a valued strategy when done properly, with attention to detail. They are not complicated but the devil is in the details. 

I'll mention too, that selling under an installment agreement will trigger 25% of the table depreciation taken from your rental will be due from the sale, so your tax obligation should be figured out to ensure you have enough of a "down payment" to cover tax liabilities. The plus side is that the gain on the sale accrues interest and is tax deferred as a percentage of the principal received.  

It's pretty much all here, well, not everything you need to know, but a lot, on BP. Good luck :)