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Who Pays Taxes On Rent to Own Home

The homeowner is supposed to pay the property taxes in case of renting. However, it’s not always clear who is the owner when it comes to renting to own. The tenant (potential home buyer) and the current owner (landlord) come to a rent-to-own agreement. Even though you live in the RTO house and have the […]
Who Pays Taxes On a Rent to Own Home
01.18.2021
Home » Who Pays Taxes On Rent to Own Home

The homeowner is supposed to pay the property taxes in case of renting. However, it’s not always clear who is the owner when it comes to renting to own. The tenant (potential home buyer) and the current owner (landlord) come to a rent-to-own agreement.

Even though you live in the RTO house and have the option to buy (no obligation to buy as is the case with lease purchase) at the end of the lease, you are not considered the owner. So you will be in limbo – in some kind of intermediate stage between a tenant and a homeowner – as long as you agree with the landlord.
This raises the question: Who should pay property taxes? Let’s shed some light on taxes associated with rent-to-own arrangements.

Who Pays What?

Before signing a rent-to-own contract, you will want to know who needs to pay property taxes and other expenses. That will prevent possible misunderstandings later on.

Real estate agents can help you find out what buyers pay and what the landlord’s responsibilities are. However, this means an extra cost for their service.

This article will make it easier for you to understand your tax responsibilities. We will break down all the costs and taxes involved in renting to own a house.

Related: Pros & Cons of rent to own.

Property taxes

Just because you’re residing in the house and are expected to purchase it in the coming years doesn’t mean you are the homeowner. The real owner of the house will be the seller until you make a down payment and officially buy the property.

The seller and the buyer set a closing date during the negotiation phase. The closing date listed on the rent-to-own agreement is the day the renter becomes the legal owner of the home. Closing is therefore the final step in the homeownership journey.

Until you have closed on the house, it will belong to the seller. That means the seller needs to pay property taxes in the meantime.

If you can’t afford to buy the home with cash, you should try to qualify for a mortgage. Remember that it involves getting a down payment when buying the house. Compare current mortgage interest rates before you apply for a mortgage.

Homeowners and renter’s insurance

Since you aren’t the legal owner yet, the insurance on the home should be paid by the landlord (seller). It’s the responsibility of the seller to carry the home owner’s insurance for structural protection and liability too. Nevertheless, you need to evaluate legal implications.

For example, if the house gets struck by lightning or in the event of wind damage, this will serve as a policy that will cover the damage. It should be pointed out that homeowners insurance doesn’t cover the renter’s personal property and valuables in most cases. That raises the need for renter’s insurance.

By purchasing a renter’s insurance, you will get peace of mind knowing that your valuables are protected during your lease period. Make sure your insurance policy covers your possessions in the RTO home or property.

Under most insurance policies for renters, coverage includes events like theft, fire, lightning, windstorms, and other natural disasters. The policy may also provide coverage for valuables like:

  • Jewelry
  • Electronics
  • Furniture
  • Clothing, and
  • Flatware

Take the time to compare a variety of policies from different insurance companies before purchasing a renter’s insurance. Choose one that best suits your own needs.

We recommend paying particular attention to category limits, insurance credit score, and deductible amounts. They all play an important role in defining renter’s insurance.

Homeowners Association Fee (HOA Fee)

This is another fee the seller needs to pay every month as the legal owner of the house. It’s an amount of money that the homeowner must pay for a residential property such as a rent-to-own home. As the name implies, homeowners association fees play a role in improving and maintaining association properties.

HOA fees typically apply to condominiums. However, they can also be levied on the owners of single-family houses. This is particularly true for RTO homes in neighborhoods that feature amenities like parks tennis courts, and community clubhouses.

When it comes to condominium owners, this fee usually covers the maintenance costs of areas like swimming pools, landscaping, lobbies, and patios. It often covers common utilities as well. Some rent-to-own properties assess HOA fees and condo fees alike.

Repairs and Maintenance Costs

The home buyer and seller should split repair costs up in their rent-to-own agreement. As a potential buyer, you need to take care of minor repairs. The seller should pay for major repairs such as air conditioning and roof repairs as well as plumbing and heating problems.

This is not always the case though. Many renters are required to make necessary repairs to the rent-to-own home at their expense. It’s often regarded as a fair bargain because the renter is expected to own the house in a few years.

With that being said, you need to clarify who is responsible for making repairs before signing a contract to avoid problems with the seller. It is a good idea to order an appraisal and inspect the property. It’s worth the extra cost.

The landlord is supposed to make the required repairs and give advance notice to the tenant before entering. Unfortunately, this is not always the case. That’s why you should put everything, including the necessary repairs, in the contract.

Make Sure All the Taxes Are Specified in Your Agreement

Do not rush into entering into anything before you specify all the taxes and expenses. That’s because every rent-to-own situation is different. Having everything in writing beforehand will prevent debate and trouble down the road. Here are the major things to specify:

  • Property taxes
  • Homeowners insurance and renter’s insurance
  • Homeowners Association Fee (HOA Fee)
  • Repairs and maintenance

Every rental contract is binding for both the tenant and the seller. The same is true for rent-to-own contracts.

As a tenant and potential homebuyer, you need to have a clear understanding of the protocol stated in your agreement. Bear in mind that most sellers try to avoid fees and taxes that are assigned to the homeowners.

Go through your agreement multiple times, just in case. Check if there is a clause in the contract that obligates you to pay fees and taxes that are typically designated to landlords (actual homeowners).

Don’t agree lightly but be ready to make different compromises when negotiating the terms of the RTO contract with the seller. There will be a lot of things to negotiate, including:

Related: Rent to own vs. rent

Summary

It is important to know what types of fees you are responsible for before entering into a rent-to-own agreement. Generally speaking, the landlord (seller) needs to pay the home owner’s insurance, HOA fees, and property taxes while the tenants are responsible for general housekeeping and home maintenance.

As a renter, you should aim to fulfill your lease obligations and comply with the duties specified in the contract. It goes beyond making repairs and maintaining rental property. In the event of lease violations, you will risk forfeiting the rent payments and option fee if your rent-to-own contract becomes void or null. So take your lease responsibilities very seriously.

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