Should You Pursue Lease Options To Purchase a Home
Leasing is a fairly popular form of living arrangement since it basically involves renting over a pre-set period of time, usually 3, 6, or 12 months at a time. Leases provide lower rates than a month by month rent. However, when looking to lease, one will often come across the ?Lease Option.? A lease option is essentially the same thing as a lease except that it provides the option to purchase the property at a future date.
The option is just that, an option. It may be an interesting offer for some renters, but others will want to pass it up. The option does not have to be taken, since there is a fee required to purchase the option. Although the amount can vary, the fee is usually up-front and paid when entering the lease. In general, lease options are offered in times of slow real estate markets, since generally owners of property look to simply sell during the hot times.
There are some definite advantages and disadvantages when it comes to a lease option. On the downside, the lease option is rarely exercised and therefore it ends up being money wasted. Many people pay the money thinking they will buy later and then either lose interest or find they can't qualify for a mortgage. When this happens, the money paid to purchase the option is lost and you will be wondering what you could have possible been thinking when you entered into the agreement.
An area where a lease option is commonly used is real estate investment. In such a situation, a real estate investor believes he or she can flip the home in a short period for a profit. They find the lease option to be very attractive because it allows them to secure the home without dedicating significant cash resources to the deal. Once they purchase the option, they then start hunting for a buyer that will pay more than the seller is looking for in the original sale. If the investor can pull it off, they exercise the right to buy and immediately sell to the third party. In many cases, the two transactions will happen at the same time! This leaves the investor with a smile on their face and the original seller in a grumpy mood.
As with anything, there are upsides and downsides to a lease option. For investors, it makes sense in many situations since it frees up cash flow. For people looking for a place to live and raise a family, it rarely makes sense.
One of the best tax breaks that the United States Tax Code allows for is the deduction of mortgage interest and property taxes paid on one=s personal primary residence. Over 66% of Americans enjoy the benefits of this tax break. The purchase of a home for the purpose of occupying it can mean thousands of dollars in tax savings for the first time home buyer. For example, the Median Household Income for Diamond Bar and Walnut, California a neighboring community) residents’ is slightly over $100,000.00 per year. Assume that a homebuyer purchases a typical home in the area with a purchase price of $600,000, and finances the purchase with an 80% conventional 30 year fixed rate loan with a rate of 6.25%. Also assume that the new homeowner falls into the 25% tax bracket. The new homeowner will have an annual tax deduction of mortgage interest of approximately $30,000 per year, and a property tax deduction of $7,500 per year! The new homeowner would have an approximate tax savings of $9,375 for the year. This factor alone makes owning your own home extremely desirable. In addition to the above mentioned annual tax break, there is also a little known tax break available to the homeowner when you decide to sell your home. Depending on your circumstances, you'll be able to avoid some taxes on the profit you make. Years ago, to avoid paying tax on the sale of a residence a homeowner had to use the sale proceeds to buy another house. In 1997, the law was changed so that up to $250,000 in sales gain or profit ($500,000 for married joint filers) is tax free as long as the homeowner owned the property for two years and lived in it for two of the five years before the sale. Please note this important stipulation, it is worth repeating, you can not qualify for the $250,000 tax free gain ($500,000 for married joint filers) unless you have lived in the property for two of the five years that you have owned the home. If you sell before meeting the ownership and residency requirements, you will owe tax on any profit you make. The IRS provides some tax relief if the sale is because of a change in the owner's health, employment or unforeseen circumstances. In these cases, the tax-free gain amount is prorated. And a ruling by the IRS in late 2002 could put more dollars in homeowners' pockets when they must sell before they qualify for the full tax break. The Treasury has defined the unforeseen circumstances that often force homeowners to sell and under which they now can get some tax relief. They include:
Death
Divorce or legal separation
Job loss that qualifies for unemployment compensation,
Employment changes that make it difficult for the homeowner to meet mortgage and basic living expenses, and Multiple births from the same pregnancy
Obviously, while both of these examples are over-simplified, as most people=s individual tax circumstances can vary substantially, they are solely used to illustrate how homeownership can be a great tax savings tool during the time period that you own your home and when you sell. The best person to advise you on tax matters is a licensed certified public accountant. I recommend that you contact your tax professional for tax advice before you buy, it might make all the difference in determining which house you make an offer on! Furthermore, although not tax related, owning your own home especially in the last few year's appreciating real estate market, has contributed to many homeowners finding that the value of their home equity has doubled or tripled during this time period. The 2000 U. S. Census Report on Net Worth and Asset Ownership of Households has determined that approximately 70% of the average American's net worth at retirement age is comprised of the value of their home equity. While this rate of appreciation has definitely cooled down in many real estate markets in recent months, in others it still has shown a healthy appreciation rate. Your best way of finding this information is by speaking to a professional realtor who can advise you on your local real estate market. Considering all the above factors, it is no wonder that it is no wonder that the U.S. Government wants you to own your own home. For more information visit Chino Hills CA Real Estate
Both Raynor James & Nef Cortez are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
Raynor James has sinced written about articles on various topics from Real Estate, Business and Finance and Debts Loans. Raynor James is with the site - FSBOAmerica.org - homes for sale by owner.. Raynor James's top article generates over 90500 views. to your Favourites.
Nef Cortez has sinced written about articles on various topics from Home Buyers Guide, Gardening and Foreclosure Help. Nef Cortez has been a licensed real estate broker and has held various positions in the real estate industry for over 25+ years. Visit his website at