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Summary

In a sale-leaseback arrangement, you sell your home to a buyer who then leases it back to you. You basically change your relationship to your home from owner to renter - and get cash equal to your equity. You may also reduce your ongoing expenses if your rent is less than expenses related to the home.

To get the most from your home, look for a family member or friend to enter into this transaction.

Keep in mind that once you sell your house, it is no longer yours and you will only have the rights of a tenant.

Taxes And A Sale Leaseback Arrangement

A sale leaseback arrangement involves a sale.

When you sell a house, the difference between what you receive and your basis (the original purchase price plus any capital improvements) is potentially taxable as a capital gain.  However, if you owned the house and used it as your principal residence for at least two of the previous five years, you can probably exclude up to $250,000 in gain if you are single or $500,000 if you are married and file a joint return. 

The person who leases your house to you will enjoy the benefits of home ownership: deductions for expenses and depreciation. Income tax will be payable with respect to the lesae income.

NOTE: Be sure that the sale is close enough to the value of the house to satisfy the IRS as a real sale such as one that would occur in an arms length transaction between two unrelated parties. If the sale is for well below market value, the IRS may argue that there is a gift subject to gift tax, and not a sale. For an idea of the value of your home, consult a local real estate broker or look online at such sites as www.zillow.com offsite link

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Taxes

What Is A Sale-Leaseback Arrangement?

A sale-leaseback is a legal arrangement in which you receive the value of your home in cash while being allowed to continue to live in it. 

As part of the same transaction, a purchaser buys your home and leases it back to you. The buyer takes over responsibility for maintaining the house, paying taxes etc.

Depending on the amount of rent you pay to the new owner, a sale-leaseback arrangement can reduce your monthly expenses since the buyer assumes responsibility for taxes, insurance, maintenance, and repairs. 

When Might I Consider a Sale-Leaseback Arrangement?

If you need cash but don't want to move out of your home, a sale-leaseback arrangement could be right for you. 

Alternatively, a sale-leaseback arrangement can also be a way of disposing of your home in advance of your death.  It allows you control over who will receive your home.

Pitfalls Of A Sale-Leaseback Arrangement

  • You trade the rights of an owner for those of a renter. 
  • If the market is weak, you might sell your home for less than you could get for it in better times. By making the sale, you to lose out on potential future gains.
  • You have to find a friend or family member to make the purchase if you want to get a reasonable amount of money. It is close to impossible to find an arm's length purchaser who would pay anywhere near market value if he or she has to leaseback the home to you.

How To Find a Buyer

To find a buyer, start by asking friends and family who might be interested in owning your house.  Point out to them that they will be helping you at a time when you need help, that they will have the right to live in the house when you leave it. They may even  enjoy a tax advantage. 

If you can't find a friend or family member to consider this type of transaction, lower the price and/or look for investors who expect the value of your property to appreciate.