How Property Taxes Work in Seller Financing

How Property Taxes Work in Seller Financing

Seller financing is an alternative homebuying method where the seller acts as the lender. Instead of securing a traditional mortgage through a bank, the buyer makes monthly payments directly to the seller over an agreed period—similar to a loan.

This arrangement can take several forms, such as:

• Contract for Deed (Land Contract)
• Promissory Note with Mortgage
• Lease Option to Buy

While seller financing gives more flexibility to buyers—especially those with low credit—it also shifts responsibilities. One of the most important? Property taxes.

Who Pays Property Taxes in Seller Financing Agreements?

In most seller financing deals, the buyer is responsible for paying the property taxes from the time the contract begins.

Even though the seller may still technically hold the deed or title (depending on the financing structure), the buyer typically:

• Lives in the home
• Uses the property
• Pays mortgage-like monthly payments
• Has “equitable interest” in the home

Because the buyer is functionally the homeowner during this period, they take on tax and maintenance responsibilities.

Why the Buyer Pays Property Taxes (Even Without Legal Title)

When a seller finances a home, the buyer gains what’s called equitable interest—meaning they are treated as the practical owner, even before they get full legal title.

From a legal and tax standpoint:

• The buyer is occupying and benefiting from the property.
• The buyer agrees to cover ownership costs in the contract.
• The seller reduces their role to that of a lender—not a landlord.

In short, the buyer pays property taxes just as they would if they had a traditional mortgage.

What Happens If the Buyer Fails to Pay the Taxes?

Failing to pay property taxes in a seller-financed agreement can lead to serious consequences for both buyer and seller.

Possible outcomes include:

• Tax liens placed on the property by local authorities
• Foreclosure or contract cancellation initiated by the seller
• Loss of all payments made if the agreement is terminated
• Damage to the buyer’s credit or legal standing

To prevent these issues, many sellers (or financing companies like Contract For Deed LLC) may set up escrow accounts to manage tax payments.

Paying Property Taxes Through Escrow

Escrow is a separate account used to collect and hold funds for taxes and insurance. Many seller-financed agreements include an escrow arrangement to ensure property taxes are paid on time.

Here’s how it works:

• The buyer pays a portion of the estimated taxes each month along with their regular payment.
• The seller (or a third-party servicer) holds these funds.
• When the tax bill is due, it’s paid out of the escrow account on the buyer’s behalf.

Escrow ensures that taxes are handled properly, avoiding surprises or missed deadlines.

Paying Taxes Directly as the Buyer

In other cases, the buyer pays property taxes directly to the county or local tax authority. This approach gives the buyer full control but also full responsibility.

If taxes are not paid on time, the local government may:

• Assess penalties
• Place a lien on the property
• Initiate a tax sale process

Sellers may also include contract terms allowing them to reclaim the property if the buyer fails to meet tax obligations.

Seller Responsibilities During the Contract Term

Even though the buyer typically pays the taxes, sellers still have some limited responsibilities, including:

• Monitoring tax payments (especially if the deed is still in their name)
• Providing the buyer with annual tax documents or statements
• Reporting the property sale and contract terms to the IRS (in some cases)
• Maintaining proper legal documentation throughout the term

At Contract For Deed LLC, we handle the paperwork and guide buyers so nothing gets missed.

Are Property Taxes Deductible in Seller Financing?

Yes, in many cases, buyers in seller-financed agreements can deduct property taxes on their federal tax returns—just like traditional homeowners.

To qualify:

• The buyer must be contractually obligated to pay the taxes.
• The buyer must actually make the tax payments.

Always consult with a tax advisor to determine eligibility for deductions under your specific contract.

Common Tax-Related Clauses in Seller Financing Contracts

A well-written seller financing agreement will address property taxes clearly. Look for clauses that explain:

• Who pays the property taxes
• How and when payments must be made
• Whether an escrow account is required
• What happens if taxes are not paid
• Seller recourse for default

At Contract For Deed LLC, we draft all contracts with these protections built in—for both parties.

How Contract For Deed LLC Handles Property Taxes

At Contract For Deed LLC, we structure seller-financed home purchases that are transparent, safe, and tailored to credit-challenged buyers.

Regarding taxes:

• We clearly outline your tax responsibility in the contract.
• We can set up escrow arrangements to manage payments.
• We guide you through property tax schedules and help ensure compliance.

You’ll always know what you owe, when it’s due, and who to contact for help.

Take the Next Step Toward Homeownership With Confidence

Buying a home through seller financing gives you the flexibility traditional banks won’t. At Contract For Deed LLC, we make sure every buyer understands their responsibilities—including property taxes—and we’re here to guide you at every step.

Contact us today to get started on a safe, credit-friendly path to homeownership in Minnesota.