Land Contracts and Medicaid: Yay or Nay?

July 26, 2017 by Elizabeth Ruthmansdorfer

I have seen a marked increase in interest from individuals asking about land contracts lately.  In one case, an individual who is already in assisted living could not sell her house.  The only buyer interested wants to do a land contract.  In another case, Dad needs income and he wants to give his house to his daughter who lives with him.  They want to do a land contract to meet both needs.  In a third case, an individual decided she is ready to downsize and wants to land contract her condo to her grandson who can’t qualify for a mortgage due to his poor credit.

Land contracts are used a lot when there is an inability to get a mortgage or when family is involved.  For Medicaid purposes, however, what is the risk?  Is there a downside?

First, what is a land contract?  It is a contract for purchase of real estate.  There is no deed issued until the end of the contract term.  This means the seller has a lot of control.  Similar to a bank, the contract can be called due for lack of payment and the buyer can be foreclosed upon.  Depending on the contract, it may be able to be prepaid without fee, with a fee or no prepayment could be allowed.  The contract determines who is responsible for the taxes, assessments and insurance premiums.  The contract outlines whether or not title evidence must be provided and whose responsibility that will be.  The contract determines when possession of the property may be given.  The contract survives death, so each party’s heirs or beneficiaries can continue the contract.

It sounds like a great deal for moving property along, right?  Here is the kicker.  For Medicaid purposes, the seller’s interest is considered an asset.  The contract can be mortgaged or sold.  Therefore, it still acts as if the seller owns the whole property.  There is a difference between real estate asset and the land contract as an asset.  Medicaid considers the land contract as personal property, not real estate.  The value of the contract is determined by identifying the value of the contract on the day it was signed and subtracting payments made on the contract, loans on the contract and valuation discounts.  This is the value of the contract.  The contract is an available asset unless: 1) the contract prohibits its sale (which could cause a divestment issue if it is to family) or 2) no one is willing to purchase the contract.  If the claim is that no one will buy it, evidence must be produced by obtaining a letter from at least one individual or organization that is in the business of buying land contracts to say they won’t buy it.  This makes it difficult to say it isn’t available.

Selling the contract might not be terrible.  The contract stays in existence and the buyer just shifts who the payments are made to.  The seller then has cash which can be used for cost of care, other items, or placed into another exempt Medicaid category like another home he or she is living in or into a special needs trust.

What about the payments?  The Medicaid handbook advises the workers to count the interest from land contract payments as unearned income.  The principal is not counted because that is a conversion of one asset to another (land to cash).  Expenses are allowed to be deducted.

What about estate recovery?  The department of health and human services will not place a lien on a property owned with a land contract.  However, they may have a claim for the payments being made from the contract or if the contract is sold.  Collection could be difficult if there is no probate, but nevertheless, there may be an assertion for the right to receive payment.

In the right circumstance, a land contract can be very helpful to transfer property when buyers are having a hard time obtaining financing or when there is some other difficulty in selling the property.  If Medicaid is a concern, hopefully this information has clarified whether or not the contract should be used as a tool for sale of real estate.

Attorney Elizabeth Ruthmansdorfer