Land Sale Contract Vs. Trust Deed

Owners can use trust deeds or land sale contracts to finance buyers.

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Land sale contracts are arrangements, usually set up as a part of owner financing, by which the buyer makes payments to the seller while occupying the seller's property. When the contract is finished, the buyer then gains ownership of the property. Trust deeds are similar to traditional mortgages and can be issued by a traditional lender or by an owner in an owner financing scenario. They both have the same effects, but the mechanisms that underlie them are different.

Land Contract Ownership Rights

Under a land sale contract, the title to the property is split. The buyer receives equitable title, which is the right to do just about anything with the property, but the seller retains legal title and technically owns the property. Full title gets transferred to the buyer only after he completes the terms of the contract.

Trust Deed Ownership Rights

In a trust deed transaction, title to the property passes to the buyer at the sale. The buyer signs a promissory note, promising to pay back the trust deed; to make it stick, she puts the title of the property in trust with a third party, called the trustee. If she doesn't make her note payments, the trustee will transfer ownership of the property to the lender, who is also the beneficiary of the trust.

Tax Treatment

When you're a buyer, the two financing structures are the same from the Internal Revenue Service's perspective. The IRS lets you write off your home mortgage interest whether the underlying loan is a mortgage, a trust deed or a land contract. For a seller, the two structures are also similar. You will have to pay regular income tax on your interest income, but your capital gains liability will be spread out over the time that you receive principal payments.

The Best Structure

The best structure depends on who you are. From a buyer's perspective, the trust deed is preferable, as he gets ownership of the property. It also helps to insulate him from the seller. On the other hand, a land contract gives the seller more control since she retains ownership of the deed. This can make it easier for her to take the property back if the buyer does not fulfill his obligations.