If you’ve signed up a tenant with a rent to own structure, there are unique requirements for recording the transactions. Here’s a recent question from Gloria.
How do i book rental income that is no longer rent but going to be payments for a purchase of property for 250,000 tenant pays 3500.00 a month towards payment?
Create a receivable? Chart of accounts “options to purchase” Asset? Help …
Great question. This can be complicated, and we recommend you work with an advisor.
Rent to own, or an Option to Purchase, is a contractual agreement between buyer (lessee) and seller (landlord). The buyer purchases an option to buy the property later. In your books, that will be recorded in a liability account (just like security deposits). Buyer and seller likely decide on a purchase price then, or let it fluctuate with the market. Traditionally, a price is agreed upon in the option. Both parties negotiate the terms, and the buyer (lessee) has exclusive rights to purchase the property during that time period. If the buyer eventually buys it or not, the option to purchase is non-refundable. Then, each month as the lessee pays rent, a portion of that goes into the purchase price. Over time, they “prepay” for the purchase, in addition to pay rent.
The initial option payment is not income until the renter exercises the option, or forfeits the option and leaves. So the initial deposit of the option payment posts to a liability account “Option – 123 Main St.”
Then, monthly payments often are counted towards a future purchase of the property. For a $1200 rent check, it could post like the following journal entry:
Cash Dr $1200
Option – 123 Main St Cr. $100
Rental Income Cr. $1100
Sometimes in option agreements renters also need to pay property tax and insurance. It is the same as if you were paying to an escrow / impound account when you get financing from a bank. In the above option, it would decrease the rental income, and credit another liability account for Impound.
This is just a start, there are other things you still need to consider such as if the tenant surrenders the option, or exercises it.
Great question – you were on the right track asking this question. We look forward to a followup in the comments below.
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