What is a Contract for Deed?
The Contract for Deed is an age-old and secure method of private financing whereby the Buyer takes over the Seller’s payments until the Buyer pays off the loan – usually by a refinance or sale a few years down the road.
The Buyer gets possession and the benefits of ownership, including future appreciation and an income tax deduction for interest and property taxes. The Seller gets the house sold and out from under the payments with no damage to his credit. This is a win-win situation.
Contracts for Deed have been around a long time. They were very common in the days before there was an established system of mortgage lending through Savings and Loans, Mortgage Brokers, Fannie Mae or Freddie Mac (now known as Fonnie and Fraudie). Since our established system is in shambles, we have to return to the tried-and-true old way of doing things.
A Contract for Deed is similar to buying on layaway in that the seller retains title to the property subject to the buyer's right to get title when he has paid the purchase price. As long as the traditional mortgage system remains in chaos, Contracts for Deed present a time-tested and viable alternative to new financing. When mortgage markets return to normal, the Buyer can refinance, pay off the Contract for Deed and obtain title to the property.
In the meantime, for tax purposes, a sale has taken place and the Buyer is liable on the loan. That means the Buyer can take a tax deduction for interest and real estate taxes - something he could not do as a renter. The Seller is deemed to have sold the property. That is important because of the rule excusing the Seller from capital gains tax provided he has owned and occupied the property for 2 of the last 5 years. If the Seller rented, the requirement of owning and occupying for 2 of the last 5 years before a sale might be lost. In short, both sides win.