Contract for Deed: Who Pays Property Tax?

A contract for deed is a form of seller financing for purchasing real property. In this arrangement, a buyer makes installment payments directly to the seller over a specified period. The seller retains the formal legal title to the property as security, while the buyer typically takes possession and begins using the home immediately. The deed, which is the official document transferring ownership, is not given to the buyer until the final payment is made. This structure differs from a traditional mortgage where a bank provides the funds and the buyer receives title at the time of sale.

Determining Property Tax Responsibility

In nearly all contract for deed scenarios, the buyer is responsible for paying the property taxes. This obligation stems from the legal distinction between holding “legal title” and “equitable title.” The seller holds the legal title, which is a formal status of ownership recorded in public records, primarily serving as security for the loan.

Equitable title grants the buyer the right to use, occupy, and enjoy the property, as well as benefit from any increase in its value. Because the buyer receives these benefits of ownership, the law generally assigns them the corresponding burdens, which include maintenance, insurance, and property taxes.

The Role of the Written Agreement

The contract for deed document is the definitive guide for how property taxes are handled. A clearly written agreement is necessary to prevent future disputes by explicitly assigning the tax responsibility. The contract should detail the specific method for payment, which commonly takes one of two forms.

The most direct method is for the buyer to pay the property taxes directly to the local municipal or county taxing authority when they become due. This approach gives the buyer autonomy over the payments and allows them to ensure the taxes are paid on time. From the seller’s perspective, this method requires them to actively monitor public records to confirm payments are being made, as non-payment puts their asset at risk. An alternative arrangement involves the buyer paying an additional amount to the seller each month, typically alongside their principal and interest payment. This extra money is held in a manner similar to an escrow account, and the seller then assumes the responsibility of remitting the tax payments to the authorities. This can be more convenient for the buyer, but it requires trusting the seller to handle the funds properly, as there have been cases where sellers collected the money but failed to pay the tax bills.

Consequences of Unpaid Property Taxes

If property taxes are not paid, the consequences affect both the buyer and the seller. The first action taken by the government is to place a tax lien on the property. This lien is a legal claim against the property that takes priority over almost all other claims, including the seller’s security interest and the buyer’s equitable interest. The existence of a lien complicates any future transfer of the title.

For the buyer, failing to pay property taxes when required constitutes a breach of the contract for deed. This default typically gives the seller the right to terminate the agreement, a process that can be much faster than a traditional foreclosure. Upon cancellation, the buyer may be evicted from the property and can be forced to forfeit all prior payments made to the seller, losing their entire investment.

For the seller, the consequences are equally severe. Since the seller holds the legal title, the tax lien is attached to their asset. If the taxes remain delinquent, the taxing authority has the power to sell the property at a tax sale to recover the unpaid amount. Should this occur, the seller could lose the property entirely. To prevent this outcome, a seller is often forced to pay the delinquent taxes themselves and then pursue legal action against the buyer for reimbursement and breach of contract.