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jenakason
January 31, 2024
Question

Closing costs associated with purchase of rental property

  • January 31, 2024
  • 1 reply
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I've created a general journal entry to capture the purchase of a rental property. Currently it looks like this (info taken from HUD statement, type of account in parentheses):

Debits:

PROPERTY NAME (fixed asset): Purchase price of $111,000

CLOSING COSTS (expense): $810

Credits:

MORTGAGE PRINCIPAL (long term liability): $83,250

CLOSING CREDITS/CREDITS TO BUYER (other current asset): $348.13

EARNEST DEPOSIT (other current asset): $1,000

DOWN PAYMENT FUNDS (other current asset): $27,211.87

 

First, are all the accounts I've established accurate? 

 

Second, this transaction now shows negative amounts in my chart of accounts for my credit to buyer, down payment funds, and earnest deposit accounts. Do these just stay as is or do I need to zero them out? The credit to buyer would have just adjusted the total due at closing (no money changed hands), whereas the earnest money and cash paid at closing was an actual transaction. Typically we take a draw from another company we own when needed to help cover the down payment, otherwise it would come from the rental property checking account. 

 

1 reply

Rainflurry
Rainflurry
January 31, 2024

@jenakason 

 

"First, are all the accounts I've established accurate?"

 

You're close.  There is no need to make an entry for the buyer credit.  Also, just to confirm, settlement fees/closing costs should be included in the basis of the property.  See IRS Pub. 551, page 2. 

 

"Second, this transaction now shows negative amounts in my chart of accounts for my credit to buyer, down payment funds, and earnest deposit accounts. Do these just stay as is or do I need to zero them out?"

 

The credit to buyer goes away and reduces your basis in the property.  The down payment should be assigned to the bank account it came from.  If it came from another business, then you should assign that to a liability account since you owe the down payment to that business.  The earnest money, when paid, should have been recorded as an asset if the company paid it and then, when you closed, the $1,000 payment (credit) would have cleared that entry.  If the earnest money was paid by the other company, it becomes part of the liability amount owed.

 

Did the earnest money and down payment come from the other company?  If so, and assuming the closing costs are non-deductible, the journal entry is below.  If I'm not understanding that correctly, please advise.

 

 DebitCredit
Property (fixed asset)111,461.87 
     Loan payable (liability) 83,250.00
     Due to Co. B (liability) amount owed for down payment and earnest money 28,211.87
J
jenakasonAuthor
January 31, 2024

Thanks for the info. That does make sense to cancel out the $810 closing cost with the $348.13 credit. I would like to keep the property name (fixed asset) price at $111,000 so I can reference what the purchase price for each property was. Do you have a recommendation for how to classify the additional $461.87? 

 
If the earnest money and down payment funds came from the rental checking account, how would I record this? Keep the general journal entry as I have it and then do a sales receipt or expense to cancel it out?

 

Rainflurry
Rainflurry
January 31, 2024

@jenakason 

 

The $461.87 should be part of the fixed asset.  That's the IRS rule.  You can have two separate fixed asset debit lines on the journal entry - one for $111,000.00 and another for $461.87 so you can see the purchase price but they should both post to the same fixed asset account.  The original carrying amount (basis) of the property is $111,461.87, not $111,000.00.  Hope that helps.   

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