If you do a simultaneous closing between the rent to own buyer and the rent to own seller, with you in the middle as the lease option investor.  This is considered a short term capital gain, no matter how long the option period.  Short term capital gains tax at the highest rate.

One great option for reducing your tax, or paying no tax at all when you sell that lease option investment is a 1031 tax deferred exchange.  This is a more advanced concept in your lease option training.

A 1031 exchange is an excellent way to defer your taxes and capital gains by taking the profit of your sale and rolling it into a property of higher value, or two or more properties whose combined value is higher than your sale.  A 1031 tax deferred exchange is a great tax strategy, but this takes a bit of planning and foresight because there are time limits to make this happen.  In other words, at the time of sale you should have a property lined up already into which you can roll the money.

As the lease option investor, you won’t actually handle the money yourself.  A company that does 1031 exchanges will play what is called the intermediary between the current sale and the new property and will move the money from one closing to the next for you.  It has to be done very carefully and with a good company or the IRS might not allow the exchange.  You can’t touch the money.  You also can’t live in the new, higher-valued property or in any of the combined properties that are in total a higher value.  You need to rent the properties or hold them as an investment since a 1031 is for investment exchanges and not personal residences.

This strategy can be used when you need to defer your capital gains.  When you are first starting out in the lease option investing business, you might not need this, but down the road it can come in handy.

This is a fairly common concern people have when it comes to lease options.  After all, repair costs can really add up if the home is older and needs maintenance or the option period is for a long time.

The answer to this really depends on what type of real estate market you do your lease option deal in and also it depends entirely on what you put into your contract.

In a seller’s market I usually have the  rent to own buyer be responsible for all repairs.  This is very convenient for a lease option investor.  My lease option contract will say that the lease option buyer is responsible for all maintenance, major and minor.  However, if I end up having to do any repairs, I’m going to add the cost to the purchase price at closing.  Let the rent to own buyer think through their own possibilities first, but if they still don’t know what to do, then send your own maintenance people and recoup the cost at closing.

For example, if the lease option buyer’s heat goes out in the middle of a Michigan winter, it’s crucial to get that fixed, both for the lease option buyer and to protect the lease option seller.  On the other hand, if the air conditioning goes out in the summer, it’s unpleasant but livable.  Do NOT make your lease option buyer unduly fix too much, because if you treat the tenant like an owner then the court may treat you like you provided seller financing instead of  a lease option.  The tenant can claim that they’ve put so many dollars into the property and the court may make you go through a forfeiture or a foreclosure versus an eviction should the rent to own buyer stop paying their rent.  In most states this would be much more expensive and much more difficult.

In a buyer’s market you can put more of the responsibility for maintenance onto the seller.  In a seller’s market, I don’t want my seller to do anything but be free and clear of that issue.  However, I have to preapprove in writing any improvements my lease option buyers do.

Keep a copy of any letter regarding maintenance in the lease option buyer’s record folder.  When a rent to own buyer calls, I record what was said for their records also.  The same goes for maintenance.  I track everything.  If the roof leaks, and someone slips and falls, accurate files will suddenly become very important!

Here are some of the reasons rent-to-own can be beneficial for you as a home seller:

1. Higher Purchase Price – Rent to own sales typically command a price premium over traditional sales.  The buyer is paying extra for the flexibility he receives by not having to do an outright purchase immediately.

2. Higher Rent – You may be able to charge more for monthly rent in a rent to own than you would for just a straight rental.

3. Cash Flow – If your monthly payments are less than the monthly rent, the difference goes in your pocket.

4. Option Fee – This upfront fee paid to you by your buyer is what secures the purchase price down the road.  If the buyer closes on the home, it would be applied towards the purchase price.  If the buyer elects to not purchase the home, the option fee is forfeited and still remains yours.  Either way you win.

5. Eliminates the Burden of the Mortgage Payment – If you have already moved on to your next home and your old house is sitting empty while you try to sell it, then you are saddled with TWO mortgage payments. I feel your pain.  Ouch! Placing a rent to own buyer that pays that extra mortgage can take away your pain.

6. Getting Your Home Sold Faster – In slow selling markets offering your home as a rent to own can help you get a buyer into the house much faster. This option will open up your pool of buyers significantly.

7. Getting Your Home Sold at All – If your home is just flat out not selling for whatever reason, offering it as a rent to own may be the only way to get it sold.

Want to learn more about selling your home as a rent to own?  See Wendy Patton’s book, Rent to Sell, Your Hands on Guide to Sell Your Home When Buyers Are Scarce.