QUOTE (seanverret @ Jan 29 2009, 07:53 AM) Thanks Mark.
First, if I owned a house for a while (2 years) and I was just about to get tenants into it who want to take advantage of the rent to own - how should I get myself prepared to make that happen?
Second, what income are you making during the rent to own process? If they`re paying the bills and supplementing the bills with an amount to make a future down payment which you are holding for them - where`s the income? Or does CRA simply view the sale as active income and thus I`m taxed fully at my current tax rate when the sale actually occurs on the sale price minus appraised price (e.g. today`s price) instead of it being a capital gain?
I hope I made that clear - perhaps I`ll call you to sort any other issues out...
Thanks
Just thought I`d jump in and try to answer. Mark, you can always correct me if I`m wrong.
1) You should have 2 documents/contracts. The 1st would be your normal lease document written up just as you would for any tenant. The second should be an Option to Purchase Agreement that lays out the details for an option to purchase. This should lay out how much of an Option Deposit they are paying up front, how much Non-refundable credit you will give them for each month they pay on time, how long a term, what the buout price will be, and what can cause a default of contract.
2) Income? There are many different ways of approaching this. Do a search on rent to own on this site and you`ll find them. Don`t forget you are still the owner during the term of the rent to own contract. They are not paying the bills (other than utilities, phone, etc); you are paying the mortgage, property tax, insurance, etc just as you would with normal rental property.
The rent amount is generally a little higher than the normal market rent. You need to show the tenant that it is much like a forced savings plan that they are building every month. Again, there are different ways to calculate this amount and I have seen several excellent posts on this site. We tend to find that a factor of the home value works well; somewhere around 0.0075 to 0.0085 of the agreed upon current value. Others have different ways of calculating this.
You also need to agree on what the buyout price will be at the end of the contract. Again different ways of doing this. We appreciate a % every year; some may call it cost of financing.
You report annual income just as you would for normal rental property. The difference that Mark mentioned is when you sell the place, the net income will probably be taxed as pasive or business income and not as capital gains.
Hope this helps,
Rob
