Contract for deed' may have tax issues and other issues with your lender!
By: Elaine VonCannon ABR, SRES, REALTOR, Notary, Team Leader, Residential and Commercial Property Manager, Managing Partner VonCannon-Starke Commercial Division, Member of the National Association of Residential Property Managers, Award Winning Agent, RE/MAX Hall of Fame, Licensed in Virginia, Member of Commercial Council VAR, Director, WAAR MLS Board of Directors
FROM ASK ELAINE:
I am an avid reader of your Blog and articles you write on real estate. Here is my question.
What is a "contract for deed"? My real estate broker suggested that I consider this, but I don't understand the concept, could explain this to me?.
Lillie Morgan, GA.
Answer: This is also called an "installment contract" or a "land contract."
Oversimplified, you enter into a contract with a buyer for the sale of your property. The contract price, for example, is $310,000. You give the deed to the property, in recordable form, to your attorney to hold in escrow. Your buyer makes periodic payments to you. And when the buyer is able to pay you in full, you instruct your attorney to record the deed into the buyer's name.
It was developed years ago, when the ranchers out West wanted to sell some acres to their farmhands.
This may sound simple to you, but there are many issues that have to be reviewed. For example, the Internal Revenue Service takes the position that such a transaction is considered a sale for tax purposes. That means that the seller has to determine whether there will be any income tax to pay when the contract is entered into.
Also, if the seller currently has a mortgage on the property, unless that loan is paid off in full or the lender approves of the transaction, it could trigger the "due on sale" clause in the seller's loan documents.
The due-on-sale clause is a concept that lenders created decades ago when they did not want their seller to allow a new buyer of the property to assume the existing mortgage. For example, if the current loan was 6 percent, and now the market for interest rates was much higher, the lender wanted to get the higher rate from the new buyer. NOTE: (In the 80's the non qualifying assumable mortgage was popular, the Reagan era did away with this.)
In simple terms, if you sold your property -- or entered into a contract for deed -- this would trigger that clause and your entire mortgage would then be due and payable.
So, you and your attorney must review your loan documents to determine if the due-on-sale clause applies. Most loan documents within the past 10 to 15 years will contain this concept.
If you own this property out right then this may work for you. You would still have your attorney review all contracts and you may even want to talk with your tax advisor. You would still have a taxable event. Other issues to consider is if the property was your primary residence or was it used as an investment property. Always do your home work and consult with the experts.
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