When the buyer pays the full amount due under the contract, the seller delivers legal title to the buyer.Įquitable title gives the buyer the right to live in the property, improve it, rent it and otherwise enjoy all of the benefits of ownership. The seller holds legal title to the property as security for payment, while the buyer has “equitable” title.
Furthermore, the IRS does not classify a lease option as a sale until the option is exercised (see, Tax Court Memorandum 1999–11).Ī contract for deed (aka “installment land contract”) is an agreement wherein the buyer makes installment payments on an arrangement similar to an automobile financing.
In rare cases, a court may recharacterize the transaction as a sale if it looks like a sale. An optionee is not bound to buy it is his option do so (or not to do so).Ī lease with option arrangement is not a sale, but rather a landlord-tenant relationship. A bilateral contract legally binds both parties to the agreement, whereas an option only binds the seller. At any time during the option period (which generally corresponds to the lease period), the tenant can exercise his option to purchase.Īn option is not the same as a regular purchase contract, which is a bilateral agreement. The option price is generally set at a fixed price at the inception of the lease, although it does not have to be.
A lease is a contract for the use and possession of land, creating a landlord/tenant (or “lessor/lessee”) relationship.Ī purchase option is a unilateral agreement wherein the optionor (“seller”) agrees to give the optionee (“buyer”) the exclusive right to the purchase the leased premises. Many investors confuse the two, and this article will help you understand the tax, legal, and practical issues between a lease option vs contract for deed.įirst, let’s start with the lease option, which is really two things, a lease, and a purchase option.
Many investors are generally familiar with the concepts lease option and contract for deed (aka “installment land contract”).
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