Lease Options and Installment contracts

Hi Kim

Welcome to the forums.  I'm sure we all hope you enjoy your time here.

As the legal paperwork for Lease/Options and Instalment Contracts is so different, I think it's best to answer your questions under a couple of headings.

Lease/Options

The legal paperwork for a Lease/Option is, as the name implies, a residential lease (as defined in each states Residential Tenancies Act) and a Call Option, i.e. paperwork that gives you the right, but not the obligation, to purchase a property for a fixed price, for a fixed period of time.  If you don't "exercise" the option within the "term" of the option, the option becomes worthless.

I understand that a lot of the usual expenses (and hence deductions) like rates etc that you might have do not apply with these set ups, as they are in fact covered by the person who lives in the property.  All residential leases are controlled by the various state Residential Tenancies Acts.  All these Acts insist that you can't charge tenants rates and insurance, etc.  As you learn more about this technique, you will also hear about "on-going option fees".  These are quite flexible and relate to an on-going cost for the option. 

Does anyone know what sort of tax deductions can be made, other than the interest you pay on your investment mortgage?  Yes, the property remains a rental property until such time as the option is exercised and the property changes hands.  This means the property retains rental property tax deductions until such time as the option is exercised.

With lease options, is the property still considered a rental until the tenant chooses to take up the "option" to buy?  Yes the property is still regarded as a rental, with the Lease governing the rights of you and the tenant.

Can depreciation claims etc still be made by me, as the title holder?  Yes.

While you remain the title holder, can any equity gains in the property be used to obtain more finance?  Yes you can refinance and take out equity but, with a long term option, you'd have to make sure you don't increase your debt above the option's "strike price".

Instalment Contracts

The legal paperwork for an instalment Contract is, a standard Contract of Sale with an Instalment Payment Schedule added (usually about 13 pages).  As with a traditional purchase, contracts are exchanged, but settlement is scheduled e.g. 30 years after exchange or whenever the new purchaser can payout the loan (sell or refinance).  This addition of an Instalment Payment Schedule, effectively turns a standard Contract of Sale into a loan document as well as its normal function as a Contract of Sale.

I understand that a lot of the usual expenses (and hence deductions) like rates etc that you might have do not apply with these set ups, as they are in fact covered by the person who lives in the property.  All council rates, water rates, insurance and maintenance of the property becomes the new buyers responsibility under an Instalment Contract.

Does anyone know what sort of tax deductions can be made, other than the interest you pay on your investment mortgage?  New buyers can access the FHOG with an Instalment Contract (IC).  This isn't possible with a Lease/Option.  If you sell a property with an IC, the Land Tax liability for that property moves from you to the new purchaser and because all our buyers are owner occupiers, the Land Tax liability for that property effectively disappears.  Other taxes concerning depreciation, etc are Federal Govt taxes. As your name is still on the title, I suggest you talk to your accountant about these types of deductions.

With lease options, is the property still considered a rental until the tenant chooses to take up the "option" to buy?  With an Instalment Contract you stay on the actual title and the new purchasers gain what's called Equitable Title.  It is important to get IC specific insurance for these properties.

Can depreciation claims etc still be made by me, as the title holder?  You are still the title holder, so I'd suggest you talk with your accountant about this question.

While you remain the title holder, can any equity gains in the property be used to obtain more finance?  In NSW and Qld, you can refinance a property that's the subject of an IC but the debt must not be increased above the new purchaser's current loan debt.  In Vic, you cannot refinance a property that's the subject of an IC.

I hope that helps but please make sure you don't rely on it, i.e. it's vital to talk these issues through with both your accountant and solicitor. 

Cheers,  Paul

Hi Kim

Here are a few web resources that may help in your search for information about vendor finance in residential real estate:
https://www.propertyinvesting.com/strategies/wraps
https://www.propertyinvesting.com/strategies/lease-options
http://www.jvpropertypartners.com.au/index.php?option=com_content&view=article&id=50&Itemid=75
http://www.vendorfinancelawyer.com.au/
http://www.vendorfinance.asn.au/   The Vendor Finance Association of Australia

Cheers,  Paul