In the 21st century economic slump, rent-to-own homebuying can be a win-win for buyers and sellers. Buyers who can't get a mortgage can still hope to own their dream house down the road. Sellers can make money from their property even if nobody's ready to buy it. This approach is also known as lease-to-own or lease-to-purchase. This arrangement doesn't come with the same tax advantages as buying your home -- but once you do buy the home, you will enjoy the same tax breaks as other homeowners.
How It Works
When someone rents to own, she leases a house -- sometimes for as long as three years -- with an option to buy that lasts as long as the lease. In addition to the rent, she typically pays a premium. If she buys the house, this additional money goes toward either the down payment or toward reducing the purchase price; if she doesn't buy, she doesn't get the money back.
The renter doesn't get the usual tax breaks associated with home ownership: He can't deduct mortgage interest or claim any of the other tax breaks he'd get as a homeowner. Depending on your income and the state in which you live, however, you may be eligible for a renter's tax deduction. For example, in Massachusetts, renters can deduct up to $3,000. The owner of the rent-to-own arrangement, on the other hand, can deduct rental expenses -- repairs, maintenance, mortgage interest, travel to the house -- from the rental income the house brings in.
Just because a rent-to-own arrangement doesn't come with a tax break doesn't make it a bad deal. If the buyer can't make the down payment immediately, leasing keeps someone else from buying the house she wants while giving her time to save money and fix any credit problems. The seller gets a higher rent than an ordinary tenant would pay. The added payments give the renter an incentive to buy and recoup the money.
To achieve a win-win, the buyer should approach rent-to-own with the same care he'd use on an outright purchase. A title search will turn up liens or claims on the property; a home inspection will show any hidden problems that make the home a bad investment. The option contract should be as detailed and thorough as a sales contract. That should include spelling out what happens at the end of the lease if the tenant hasn't used the option: Can he renew the lease or is the game up?