When buying a rental property, there are a few critical pieces of information needed to ensure your accounting and tax returns are compliant and accurate.
Here is a checklist of key details needed for your rental property purchase, and why they’re important for your accounting:
- Purchase date
- The actual purchase date sets the timing of your CapEx as well as the start date for depreciation. You can record your purchase transactions in Azibo.
- Purchase price
- For accounting purposes, always separate purchase price into the building value and land value right after your purchase. The best way is to check the county property appraiser’s office for this information. You can also get advice from a CPA.
- Both building and land values go into the Cash Flow statement as part of the Capital Expenditures, and also appear in the Balance Sheet as noncurrent assets. While land value remains constant, building value (together with future improvement CapEx) incurs depreciation over time.
- Loan cost
- Loan cost consists of all the fees associated with obtaining a mortgage or other loan. This includes lender fees, appraisal fees, attorney fees, or even tax.
- Loan cost is not an expense, but instead goes into the Cash Flow Statement as CapEx, and into the Balance Sheet as an asset. Loan cost will be amortized in accordance with the underlying asset.
- Closing cost
- Closing cost consists of fees that occur when the title of a property is transferred from the seller to a buyer. This includes title fees, inspection fees, title insurance, and more.
- Similar to loan cost, closing cost is not an expense. It goes into the Cash Flow Statement as CapEx, and into the Balance Sheet as an asset. Closing cost will also be amortized in accordance with the underlying asset.
- Loan amount
- The loan amount goes into your Balance Sheet as a liability. It declines overtime as you make your monthly mortgage payments, and your equity increases accordingly.
- Escrow refers to a neutral third party holding assets or funds before they are transferred from one party in a transaction to another. The third party holds the funds until both buyer and seller have fulfilled their contractual requirements. Additionally, throughout the term of the mortgage, an escrow account will hold funds for taxes and homeowner’s insurance. Learn more about insurance escrow deductions
Disclaimer: This content has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for accounting or tax advice.