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How to Enter in Quickbooks Desktop Sale of an Asset with Owner Financing and Promissory Note

Forum|Forum|2 years ago
October 26, 2023
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My LLC recently sold one of the office condominiums that it has been leasing for the past 20 years. Herein I am asking how to enter this transaction in QB Desktop. Note: for calculation ease and privacy the following are not the actual dollar values. The sale amount is $100,000. The LLC is financing the sale. I would like to enter in QB as an installment sale. The buyer: earnest money $1000; downpayment $10,000; promissory note $89,000; monthly payments of $1000 for 5 years at which time a balloon payment is due. Seller paid real estate commission of $4,000. Accumulated depreciation is $ 25,000. If additional information is needed, please advise. Thank you.

QuickBooks Desktop

Best answer by Rainflurry

@impedance19

"1. According to your note you included the commission-paid of $4000 in the "Bank Account" debit entry and also as a "Commission Expense" debit of $4000, is this correct?"

Yes, correct. I mentioned that because I assumed the $4K was withheld from your closing proceeds, thereby reducing the debit entry by $4K ($1K + $10K - $4K), as opposed to a separate $4K credit entry if you had paid the commission separately. A debit to your bank account is a balance increase in accounting terms. Unlike how when a bank takes money out of our account, they "debit" it. Therefore, in accounting, when you credit your bank account, you are reducing the balance.

"I follow all of your entries (except as noted in [1] above). The problem I have is that as you have shown, the "Gain on Sale of Asset" of $69,000 (the real number is much higher) would count as income in 2023; therefore, if I understand correctly, I would have to pay taxes on this total gain with my 2023 tax return. Since this was owner-financed I have not received any cash (other than the down payment), but only a promissory note. Is there a way to enter this transaction so that I pay taxes each year only on the monthly income received during each year from the purchaser as he pays off the loan?"

Great question and I should have mentioned it in my post. The journal entry I gave you is the proper way to record it in terms of financial accounting. That is different than the tax implications (tax basis) of the sale. You are correct that the amount financed is not necessarily considered gain from a tax basis perspective since this will qualify as an installment sale. Your CPA/tax accountant should handle the proper way to record this from a tax perspective. Based on what you or I know, there is no way to properly record this in QB from a tax perspective at this point. Most CPAs do not make adjusting entries that take into account the tax implications of the sale. The gain is booked as per my journal entry and the adjustments are made on the tax return. Presumably, you have a CPA/tax accountant? I would not recommend trying to prepare a return containing an installment sale without professional help.

If you prefer, you can change the account name used to record the "Gain on Asset Sale" to "Deferred Gain on Asset Sale". However, this requires making a journal entry each month or at year-end to move the amount of deferred gain to gain by debiting "Deferred Gain on Asset Sale" and crediting "Gain on Asset Sale". That really is not necessary as your tax returns are what matter and it creates more work/more room for errors). Hopefully, this all made sense.

Rainflurry

@impedance19

What is the original cost of the office condo recorded in the books? That's the missing piece to complete the journal entry.

S

SirielJeaB

Thanks for sharing your detailed concern in the Community space, impedance19.

I acknowledge the relevance of recording your transactions accurately in QuickBooks Desktop (QBDT). To track the sale of the office condominium, let's utilize the progress invoicing within the program. It allows you to split an estimate into as many invoices as you need because instead of asking for the entire amount, you can invoice customers for partial payments. Here's how:

Step 1: Turn on progress invoicing

Step 2: Create an estimate of $100,000

Step 3: Create progress invoices of earnest money of $1,000 and a downpayment of $10,000

Step 4: Receive the payments of each invoice to get an open balance of $89,000.

Please note that for the monthly payments of $1,000 for 5 years, simply continue creating progress invoices from the estimate.

For detailed instructions on each step, please refer to this article: Set up and send progress invoices in QuickBooks Desktop.

You can set up the real estate as a Sales Rep, then generate a check to record the commission of $4,000. And create a journal entry to track the accumulated depreciation of $ 25,000.

I'd also recommend reaching out to your account for further guidance and maintain the accuracy of books.

You'll want to remind your customers about their invoice due dates. Check out this article: Send invoice reminders automatically or manually in QuickBooks Online.

Just leave a comment below if you have further questions about handling sales transactions. I'm prepared to help you. Have a successful business venture.

I

impedance19Author

Thank you very much for your comprehensive reply. I will review it and let you know if I have any additional comments.

Rainflurry

@impedance19

The journal entry to record the sale is below. I combined the cash into one $7K debit entry - that total is the earnest money + down payment - commission paid. You may need to break out the $7K into separate debits depending on how you received funds at closing/received the earnest money for reconciliation purposes. Also, I combined the asset credit into one $56K entry which includes the original cost plus improvements. If you have separate asset accounts for the improvements, you will need to enter the original cost and improvements as separate credits. There is no entry to be made for payments on the loan until they are received.

	Debit	Credit
Bank Account	7,000
Note Receivable	89,000
Accumulated Depreciation	25,000
Commission Expense	4,000
Fixed Asset (to remove original cost and improvements)		56,000
Gain on Asset Sale		69,000

I

impedance19Author

Rainflurry, thank you very much for your response. I have a couple of follow-up questions:

1. According to your note you included the commission-paid of $4000 in the "Bank Account" debit entry and also as a "Commission Expense" debit of $4000, is this correct?

2. I follow all of your entries (except as noted in [1] above). The problem I have is that as you have shown, the "Gain on Sale of Asset" of $69,000 (the real number is much higher) would count as income in 2023; therefore, if I understand correctly, I would have to pay taxes on this total gain with my 2023 tax return. Since this was owner-financed I have not received any cash (other than the down payment), but only a promissory note. Is there a way to enter this transaction so that I pay taxes each year only on the monthly income received during each year from the purchaser as he pays off the loan?

Thank you!

RainflurryAnswer

@impedance19

"1. According to your note you included the commission-paid of $4000 in the "Bank Account" debit entry and also as a "Commission Expense" debit of $4000, is this correct?"

Yes, correct. I mentioned that because I assumed the $4K was withheld from your closing proceeds, thereby reducing the debit entry by $4K ($1K + $10K - $4K), as opposed to a separate $4K credit entry if you had paid the commission separately. A debit to your bank account is a balance increase in accounting terms. Unlike how when a bank takes money out of our account, they "debit" it. Therefore, in accounting, when you credit your bank account, you are reducing the balance.

"I follow all of your entries (except as noted in [1] above). The problem I have is that as you have shown, the "Gain on Sale of Asset" of $69,000 (the real number is much higher) would count as income in 2023; therefore, if I understand correctly, I would have to pay taxes on this total gain with my 2023 tax return. Since this was owner-financed I have not received any cash (other than the down payment), but only a promissory note. Is there a way to enter this transaction so that I pay taxes each year only on the monthly income received during each year from the purchaser as he pays off the loan?"

Great question and I should have mentioned it in my post. The journal entry I gave you is the proper way to record it in terms of financial accounting. That is different than the tax implications (tax basis) of the sale. You are correct that the amount financed is not necessarily considered gain from a tax basis perspective since this will qualify as an installment sale. Your CPA/tax accountant should handle the proper way to record this from a tax perspective. Based on what you or I know, there is no way to properly record this in QB from a tax perspective at this point. Most CPAs do not make adjusting entries that take into account the tax implications of the sale. The gain is booked as per my journal entry and the adjustments are made on the tax return. Presumably, you have a CPA/tax accountant? I would not recommend trying to prepare a return containing an installment sale without professional help.

If you prefer, you can change the account name used to record the "Gain on Asset Sale" to "Deferred Gain on Asset Sale". However, this requires making a journal entry each month or at year-end to move the amount of deferred gain to gain by debiting "Deferred Gain on Asset Sale" and crediting "Gain on Asset Sale". That really is not necessary as your tax returns are what matter and it creates more work/more room for errors). Hopefully, this all made sense.

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