Flipping Real Estate – Handling expenses and equity accounts

Question

When flipping real estate, I understand that all expenses for that property are recorded as WIP then moved to COGS on the sale. When entering the final Settlement Statement, should I list all those costs such as escrow fees, property tax, commission, etc to the WIP account? Or should I itemize them to the corresponding COGS/expense accounts? To simplify the accounting, can everything for a property be added to the WIP account, possibly in different sub-categories – rehab, holding costs, selling costs, etc.? That would seem like the simplest way to do it.

Regarding general expenses, I have those labeled as a class. At the end of the year, I run a report and add up the total so that I can split them equally between the three partners. How do I do that so it reflects on each partner’s equity account? Do I do it by journal entry? Also instead of waiting till the end of the year, can I do the split at time of recording the item, then reflect that to each partners equity account throughout the year? Thanks for any advice!

qbteachmt · Accepted Answer

I don't use Class at all. That is a redundant additional cross-reference to Jobs.

You want to read my handout.

Customer (Jobs) allow you to make an Estimate for the scope. It allows you to list Functional aspects, such as Subcontractor labor of various types, doors and Windows and Landscape and Permits and Engineering and even Debt Service that is WIP, not Expense. Items allow you to use Quantity. The Job reporting relies on your use of Items.

Class is a Financial Cross-reference. I would use Customer Type and Job Type before I use Class Tracking, for instance, but you might need to use Class tracking because you have two Divisions, such as Remodel (where all items are expense-income activities) and Spec (where the set of items are all WIP). Customer Type might be Multi-Unit vs Single-Family. Because the Type is Descriptive but the Class is Financial, that's why it would matter. But the Items control the data flow, as well.

Please read the handout. I explain it pretty thoroughly, there. I include set up instructions, images, how to make the custom reports, etc.

qbteachmt · Answer

Please see my attachment for Flipping.

COGS is not moved "on" the sale, but as a result Of the sale = for that same date. You don't want it On the Sale, because it is part of Costs, not part of Sales.

You put into WIP what you need to accrue, to move it later. If you incurred it at closing, it is part of Expense and not going to be Held. WIP = holding on the invested values until completion.

"possibly in different sub-categories"

Use Items. Not more Accounts. Plus, using Items allows you to include Quantity, Purchase Orders (to watch for overbilling) and Estimates (to stay in budget). That would be the Best way to do it.

"Regarding general expenses, I have those labeled as a class."

You don't need Class at all. Projects in Desktop are managed by Customer:Job, so the only reason to use Class might be, for instance, State (because you have different tracking and reporting requirements) or Public vs Private Housing (because you use different crews and have subsidized labor or Davis/Bacon Wage and governmental contract considerations). Although, I use Customer Type and Job type, instead of Class. Class shows everywhere once you enable it; so Always assign class to everything, if you use it at all. I find that gets tedious and is overkill for the reporting needs. But Class could = Remodel or Spec, for the types of projects, for separation of the items, the insurance values, etc, that relate to each line of business.

"At the end of the year, I run a report and add up the total so that I can split them equally between the three partners."

Uh, no. The Entity has its own tax form. Then, the results of that tax form get Split. Each partner gets their K-1 from the tax entity tax return.

"How do I do that so it reflects on each partner’s equity account? Do I do it by journal entry?"

Once the taxes are done fro the entity, sure, you can split the Retained earnings per the K-1, so that RE as of the first date of the new year, will show 0, and each Partner has that allocated in their equity breakdown per the K-1.

"Also instead of waiting till the end of the year, can I do the split at time of recording the item, then reflect that to each partners equity account throughout the year?"

Never. And you already learned this: https://quickbooks.intuit.com/community/Reports-and-accounting/How-do-I-post-the-profit-on-a-real-estate-sale-flip-to-each/m-p/197653#M3294

Stop trying to be Three Musketeers as individuals; you need to be As One. You are partners in a business Entity. This Entity has the activities. You benefit from the End of the Year performance of this entity. Not each activity, each date, every dollar.

Make sure you have a CPA to guide you. They will keep you on track and head off this type of concept before it gets you into trouble.

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