How do we treat a "Rent to Own" agreement for rental properties?

[lollydaw33]

We have acquired 4 rental properties from an LLC and in 5 years, we will own these properties.  The agreement is titled "Contract for DEED (Bond for Title" and there is a section in the agreement that states" Whereas, Buyers agree to lease and subsequently to purchase said property under the terms and conditions set forth herein."  The closing for these properties is not until 2021. The original owner still holds the titles, pays the insurance and property taxes.  We collect the rent and pay him a lump sum each month. We pay for minor repairs and maintenance on the houses.  We have leases signed stating that we are the landlords.  Do we list these houses as rental properties that we own although we don't own them?  Can we depreciate them?  If we can't depreciate them, can we write off the monthly payment to the owner of the houses as an expense? This is a very unusual situation.

[PatriciaV · Accepted solution]

A "Contract for Deed" (also known as a Land Contract) is used when a seller finances a property for a buyer. The IRS treats this transaction as an Installment Sale or seller-financed loan. In general, the buyer may deduct the interest portion of payments made under the contract and any property taxes paid on the property.

You may report the activity for these properties on Schedule E, found in the Rental Properties & Royalties section of TurboTax.

The easiest way to find the topic is to use the Search box at the top right side of the TurboTax header. Enter "schedule e", hit Enter, then click "jump to schedule e". This will take you directly to the start of this section.

Or go to My Account >> Tools >> Topic Search. Type in "schedule e", then click the topic in the list.

(If you are using the mobile app and don't have My Account or Tools on your screen, try logging into TurboTax from a laptop or desktop browser.)

Set up each rental property separately. You may can take depreciation based on the fully agreed-upon purchase price of the property. 

Tenant payments would be rental income. Maintenance costs would be deductible rental expenses.

Payments to the seller must be allocated to principal (non-deductible) and interest (expense).

Additional Information:

• IRS Pub 527 "Residential Rental Property"
• Where do I enter income and expenses from a rental property?
• What kinds of rental property expenses can I deduct?
• How do I handle capital improvements and depreciation for my rental?