How rent-back agreements work | Terms of a rent-back agreement | Tax consequences | Is a rent-back agreement right for you? | FAQs
A rent-back agreement (also known as a lease-back, post-settlement occupancy agreement, or seller's temporary residential lease) is a legally binding contract that allows a home seller to remain in their home, usually for up to 60 days AFTER closing on the sale.
The buyer acts as a landlord, collecting rent until the seller formally moves out.
If the seller isn't in a hurry to move, a rent-back agreement can help them buy time to find their next home. At the same time, buyers can use these to make their bids more competitive. BUT rent-back also comes with some baggage for both buyers and sellers.
How rent-back agreements work
Setting one up | Establishing terms
After the buyer and seller sign the rent-back agreement — meaning they agree to its terms AND include it as a contingency in sale — and close on the home, the seller becomes the renter and the buyer now acts as the landlord.
As the new property owner, the buyer is often responsible for maintenance and repairs, though the terms of the rent-back agreement vary.
A rent-back agreement changes the relationship between the buyer and seller. While that relationship doesn't have to be complicated, we recommend getting advice from a real estate professional, attorney, AND an accountant before moving forward.
Steps to create a rent-back agreement
- The buyer OR the seller can propose a rent-back agreement, depending on the circumstances of the sale, the local real estate market, and each party's needs.
- If both sides are open to a rent-back, they need to negotiate the terms of the agreement. If the rent-back term is shorter than 30 days, the buyer and seller can use a seller in possession form to streamline negotiations.
- The buyer notifies their lender about the rent-back agreement.
- When all of the details are finalized, the parties sign the purchase agreement (with the rent-back contingency) close on the home sale.
- As the homeowner, the buyer is now legally a landlord; the seller now acts as a conventional renter. This relationship remains in place until the end of the rent-back period, when the seller is required to move out of the home.
❗️ Buyers and sellers should work with a realtor AND an attorney with experience in rent-back agreements. While the terms of the agreement might not be complicated, it's still a legally binding contract that would benefit from an expert's careful review!
What's covered in a rent-back agreement?
Similar to a conventional rental agreement, a rent-back agreement addresses the cost of rent, utilities, and the security deposit, plus who will pay for the home insurance and other items.
If one party violates any of these terms — like if the seller doesn't pay rent — the other party has the right to pursue damages.
Usually, the buyer will set a rent amount that reflects their monthly cost of homeownership. While they won't be occupying the house, they'll still have to make monthly payments on it (e.g., their home loan, HOA fees).
There's no "correct" way to calculate how much to charge the seller, but buyers often consider these factors:
- Mortgage principal
- Interest
- Property taxes
- Home insurance
Another common benchmark is the current average local rent, which may be less expensive.
Rent-back agreements are almost always shorter than 60 days — exceeding this brings some serious complications for the home buyer.
Lenders commonly require buyers to occupy their homes within 60 days of closing.
If a buyer fails to move in within this time frame, the lender might mistake this home purchase for an INVESTMENT purchase and seek changes to the home loan to reflect this, like a higher interest rate.
Some states provide seller in possession forms, which buyers and sellers can use for rent-back agreements shorter than 30 days. These outline all of the terms you need to negotiate for a rent-back agreement: rent, a security deposit, length, etc.
Rent-back agreements also need to address other items that you'd find in a conventional rental agreement.
💰 A security deposit can assure the buyer that their home will be in the same condition when they eventually move in.
💡 Utilities may be easier for the seller to handle, as their name is likely still attached to the electric and gas bills. But either the buyer or seller can pay utilities.
🛠 Maintenance and repairs are usually paid for by the buyer, since they're acting as the landlord.
🏠 Home insurance is typically paid by the home buyer, since they now own the property. But they can roll the cost of this into what they charge for rent.
⛔️ Entry into the home is a potential sticking point while negotiating a rent-back agreement. While the buyer now owns the home and may want to begin moving in some items, the seller still lives here and has some claim to privacy. Outlining when and where the buyer can enter the property can avoid conflict.
Will a rent-back agreement complicate my taxes?
If you're a home buyer, a rent-back agreement requires you to report any rental income as "Other Income" on your taxes.
Usually, a homeowner needs to report rental income on a Form Schedule E for "Income and Loss from Rental Real Estate." However, this applies more to long-term rentals (i.e., for rental periods LONGER than 60 days).
Sarah York, enrolled agent with the IRS, explains: "Schedule E is for ongoing rental properties that you intend to make a profit with, whereas a rent-back arrangement is a one-time, temporary deal." She warns, "Trying to use this approach with a rent-back agreement could get you into trouble with the IRS."
Forgoing collecting rent in exchange for a lower purchase price could also affect your taxes in the future.
"A lower purchase price will only mean higher capital gains when you sell down the road," says York. Instead, she advises declaring rent you'd collect as "Other Income" to avoid any hairy situations with the IRS.
How a rent-back agreement can impact your home loan
If an agreement exceeds 60 days or if the seller otherwise doesn't vacate by this point, your lender might recategorize your home purchase as an investment purchase and ultimately seek costly changes to your mortgage. That can be hard to reverse.
Is a rent-back agreement right for you?
Rent-back agreements can be useful, whether you're the buyer or the seller. But they do come with some risks for both sides.
A rent-back is RIGHT for you if you want… | A rent-back is WRONG for you if you don't want to… | |
|---|---|---|
Buyers | ✅ A more competitive bid ✅ Lower overall cost of purchasing the home ✅ A low-stakes way to try being a landlord ✅ More time to move out of your current home | ❌ Have added responsibilities of being landlord ❌ Worry about the seller moving out by the agreed-upon date ❌ Complicate the terms of your home loan ❌ Wait to move out of your current home |
Sellers | ✅ More time to move into your next home ✅ More time to search for a new home ✅ To avoid finding temporary housing between homes | ❌ Pay rent ❌ Pay a security deposit ❌ Have a landlord |
FAQs about rent-back agreements
A rent-back period is negotiable. However, they almost never exceed 60 days. If it's longer, the buyer might complicate their home loan with their lender.
This is negotiated by the buyer and the seller. It often reflects what the buyer will pay monthly on their mortgage. The buyer could also forgo collecting rent and opt for a lower price on the home purchase.
Buyers need to declare any rental income on their taxes that year as "Other Income." Importantly, this is different from what typical landlords do, which is use a Form Schedule E "Income and Loss from Rental Real Estate." BUT using this form for rent-back agreements could complicate your taxes.
Related links
This piece required dozens of hours of research from Clever's research and editorial teams.
We also talked to real estate and tax experts to give readers a better understanding of this topic, including Sarah York, an enrolled agent with the IRS and a staff writer for Keeper Tax.