When you buy a home through owner financing, figuring out who pays property taxes on owner financing can feel confusing.
I’ve seen many buyers and sellers stress over this question.
In this article, I’ll walk you through exactly who’s responsible for property taxes in these deals. Trust me, understanding this upfront saves headaches later.
Let’s clear up the confusion together.
Understanding Owner Financing
Owner financing offers an alternative path to homeownership where sellers act as lenders for buyers.
Owner financing happens when a property seller finances the purchase directly instead of the buyer getting a bank loan.
The buyer makes monthly payments to the seller over time, helping people who can’t qualify for traditional mortgages. Both parties sign a contract outlining payment terms and interest rates.
The buyer makes a down payment followed by monthly installments. The seller keeps the property title until full payment and can reclaim the property if payments stop.
Who Pays Property Taxes on Owner Financing?
Property tax responsibility depends on ownership status and what’s written in your contract.
In most owner financing deals, the buyer takes legal ownership while the seller becomes a lien holder. Whoever holds legal title typically owes the taxes, though contracts can assign this differently.
Most agreements make the buyer responsible for property taxes since they live in the home. Always check your specific agreement to confirm who pays.
How Property Tax Responsibility Is Defined in the Contract
Your contract language determines who owes taxes and when payments are due.
The promissory note outlines repayment terms and who pays property taxes, legally binding the buyer to these terms.
A mortgage or deed of trust secures the seller’s interest and can give sellers foreclosure rights if taxes go unpaid.
Your agreement should clearly state who pays property taxes and when. Get everything in writing to protect everyone involved.
Property Taxes in Different Owner Financing Structures
Different financing arrangements handle property taxes in various ways based on ownership transfer timing.
Land contracts keep the property title with the seller until full payment, but buyers usually still pay property taxes since they have equitable interest in the property.
During rent to own deals, sellers typically pay property taxes until the buyer exercises their purchase option and tax responsibility shifts.
In wraparound mortgages and second mortgages, buyers usually handle all property taxes. Terms should clearly address how taxes get paid.
What Happens If Property Taxes Are Not Paid?
Unpaid property taxes create serious problems for both buyers and sellers in financing deals.
Tax Liens and Government Penalties
When property taxes go unpaid, local governments place liens on the property. These liens take priority over most other debts, including mortgages.
Counties charge penalties and interest on late payments. Eventually, the government can sell the property at a tax sale to recover money owed.
This happens even if you’re making regular payments to the seller. Tax authorities don’t care about private financing arrangements. They want their money regardless of who holds the mortgage.
Risks for Buyers
Buyers who don’t pay property taxes risk losing their home and all money invested. The county can foreclose through a tax sale after sufficient delinquency.
You could lose your property even if you’ve paid the seller faithfully. Your credit score takes a major hit from tax liens.
Future lenders see you as high risk. Some seller contracts include acceleration clauses allowing immediate foreclosure for unpaid taxes. Budget carefully to avoid these problems.
Risks for Sellers
Sellers face losing their security interest when buyers don’t pay taxes. A tax lien takes priority over the seller’s mortgage interest.
If the property goes to tax sale, the seller might not recover their investment. Some sellers must pay delinquent taxes themselves to protect their interests.
This creates unexpected expenses and complications. The seller’s lien position weakens when tax problems arise. Clear contracts and monitoring help sellers avoid these issues.
Pros and Cons of Buyer Paid Property Taxes
Having buyers pay property taxes offers benefits but also creates responsibilities for everyone.
| Pros | Cons |
| Sellers avoid ongoing property tax expenses and administrative burden once they transfer ownership |
Buyers must budget for property taxes on top of their monthly payments to the seller |
| Sellers can focus on collecting monthly payments instead of tracking tax deadlines | Taxes can amount to hundreds or thousands of dollars annually with strict deadlines and penalties |
| Buyers build equity and ownership rights when they pay taxes directly on the property | Buyers need to plan ahead and save money throughout the year to avoid financial struggles |
How Buyers and Sellers Can Protect Themselves
Taking protective steps prevents tax disputes and legal problems in owner financing arrangements.
Read your contract carefully before signing and look for clauses about property tax responsibility. Insist on adding tax language if it’s missing.
Hire a real estate attorney to review your documents, spot problems, and ensure your contract complies with state laws.
Consider setting up an escrow account where the buyer pays monthly and a third party manages tax payments when due.
When Owner Financing Makes Sense Despite Tax Responsibilities
Owner financing works well for specific buyers and sellers even with tax payment considerations. People with low credit scores or irregular income often can’t get bank loans.
Owner financing gives them a path to homeownership where they build equity. Sellers expand their buyer pool and help properties sell quickly.
They earn steady interest income and can negotiate terms that protect their interests including tax payment requirements.
Conclusion
I’ve seen too many people confused about who pays property taxes on owner financing. Usually, it’s the buyer, but your contract is what really matters.
I always tell people to read every word before signing and get a lawyer involved. Property taxes might seem small, but unpaid taxes can cost you everything.
Take the time to understand your responsibilities now, and you’ll thank yourself later.
Got questions about your own owner financing deal? Drop a comment below or share this with someone who needs it.
Frequently Asked Questions
Does the buyer or seller pay property taxes in owner financing?
In most owner financing deals, the buyer pays property taxes. However, the contract terms determine actual responsibility. Some agreements have sellers pay temporarily, especially in land contracts or during rental periods. Always check your specific agreement.
What happens if property taxes aren’t paid on owner-financed property?
The county places a tax lien on the property, which takes priority over mortgages. Eventually, the government can sell the property at a tax sale. Both buyers and sellers risk losing their investment and legal rights to the home.
Can a seller require a buyer to pay property taxes?
Yes, sellers can include property tax payment requirements in the financing contract. Most owner financing agreements make buyers responsible for taxes. The promissory note or deed of trust typically specifies these obligations clearly.
How are property taxes handled in a land contract?
Land contracts usually require buyers to pay property taxes even though the seller holds the title. The contract should clearly state who pays and when. Some sellers pay and bill buyers separately to ensure taxes get paid on time.
Should I set up an escrow account for property taxes in owner financing?
Setting up an escrow account is smart protection for both parties. The buyer pays monthly into the account, and funds are used to pay taxes when due. This prevents missed payments and reduces risk for everyone involved.
