The Best & Worst of a Land Contract

When you use a non-traditional purchase agreement for real property, it often creates a tricky situation for the seller and buyer.


how do land contracts work? | www.deductingtherightway.com

Product Recommendation: Legal Zoom, NOLO 
[We may earn a commission or referral fee when you click on the links appearing in this post. Read full disclosure].


What happens with a traditional real estate closing?

In a typical real estate deal, both parties sign a written contract, and a deed is used to memorialize the sale which is recorded in the county where the premises is situated. On average, the closing process can take from 30 to 60 days depending on the complexity of the sale and the availability of third-party service providers (attorney, title company, appraiser, inspector, property insurer, financial institution).

What is a land contract and how does it work?

A less common alternative is to purchase a for-sale-by-owner home or investment property using a land contract or similar instrument (if allowable per state law) and holding a deed in trust.
  • In this scenario, you refer to the seller as the legal title owner and the buyer as the equitable owner, see Baird v. Commissioner, 68 T.C. 115, 124 (1977). 
  • For tax purposes, the legal title owner no longer claims the income or expenses for the property on their tax return  the equitable owner takes a deduction for the operating costs and claims the income.
  • Depending on the stipulations of both parties, the deed might not be recorded in the county clerk's office. Regardless, each party must report the transaction on their respective tax return for the year it took place as opposed to waiting until the deed it is ultimately recorded.

Now let's look at the pros and cons of a land contract.

PROS
  • Quicker closing
  • Traditional financing not required
  • The transaction does not appear on credit report

CONS
  • Specific actions will require you to get the seller involved since they are the owner of record (e.g., applying for permits)
  • Liens attaching to the property may prevent the deed from being recorded (or paid off by the buyer at his/her expense)
  • Unexpected legal problems may arise
TIP: Make sure a licensed attorney prepares the closing documents for a land contract and have your accountant advise about the tax ramifications.



DISCLAIMER: Please consult with your accountant, attorney and financial advisor before implementing any tips displayed on this website. DIY research does not replace the advice of a licensed professional who has thoroughly reviewed your file.