The property purchase journal entry - for recent acquisitions
This guide details how to make a property purchase journal entry based on your closing statement. For a general discussion and more context on the concepts below, check out this resource article.
Create the property fixed asset and loan account
1) Create a fixed asset for the property.
- Select 'A Property' from the first screen.
- Give it a name. The property address is fine, or '123 Main St Asset'
- The placed in service date is when the property was first listed for rental. You can also leave it blank for now and fill out later.
2) Set up the loan account from the Loans page.
- Navigate to the Loans page, under Accounts on the left side menu. Click Add Loan in the upper right.
- Click here to learn more about loans and the loan payment template.
- Skip this step if you did not finance the purchase.
Create the journal entry
1) Click Add Transaction and select Manual Journal
2) Enter the purchase date, property, description, and fixed asset.
3) Enter the debits as follows:
Select the account from the dropdown, and enter the value. Click Add Line as needed.
- Buildings. This is the main account for the depreciable basis of the property.
- The formula to calculate your Buildings value is (Purchase Price - Seller Credits) * (ratio of Building value / total value from the most recent tax assessment).
- Property basis includes both Buildings (sometimes called Improvements), which is depreciable, and Land value, which is not depreciable. This information is present on the property's tax assessment, and can typically be found through the tax assessor's office via your local government website. The tax assessment provides the current assessed value, broken down by Land value and Buildings value. Determine the ratio of Buildings/Improvements to the total property value.
- Example: You purchase 123 Main St for an effective price of $100,000. The most recent tax assessment showed the property worth $90,000, with the land valued at $15,000 and the Buildings/Improvements at $75,000. Therefore, $75k of the $90k is Buildings value, for a 0.833 ratio. Multiply that ratio by your effective price ($100k) and you get $83,333 for the Buildings value, and $16,667 for the Land value.
- Land. This is the main account for the non-depreciable basis of the property.
- The formula to calculate your Land value (Purchase Price - Seller Credits) - (Building value as determined above).
- Capitalized Closing Costs. Many of your closing costs should be capitalized and depreciated over time. These include:
- Title fees and insurance, surveys, recording fees, legal fee, and transfer taxes.
- Most costs associated with obtaining a loan should be capitalized, including loan origination, processing, underwriting fees, purchased points, appraisals, credit reports, etc.
- Additionally, anything you pay on behalf of the seller (such as unpaid taxes or real estate commission) can also be capitalized.
- Find these items on your closing statement, sum them together, and enter them as a debit to the Capitalized Closing Costs account.
- Tax deductible closing costs, entered individually to the specific expense account. These can, but don't necessarily include:
- HOA fees (which can be created as a sub-account of Other - not a default expense category)
- Mortgage interest
- Your closing statement may also show adjustments for expenses prepaid by the seller and/or unpaid by the seller. Prepaid expenses should either be added as a new debit line, or combined (increasing the value) with the existing value in the same expense account. Unpaid expenses should either be added as a credit line, or reduce the existing debit, for the relevant account.
- Escrow account prefunding (if applicable). If your loan is escrowed, an escrow account was automatically created when you set up the loan.
- You don't need to worry about any individual line items here- if present, they are estimates. Enter the total transfer or prefunding amount.
4) Enter the credits as follows:
- The loan account. Enter the total initial loan balance.
- If the property was not financed, omit this line.
- The bank account that funds came out of, or choose Owner Funds. Enter the amount of your cash paid at closing.
- Earnest money deposits:
- If you have not previously accounted for earnest money, select your bank account or Owner Funds, and enter the amount of your EMD.
- If you have previously entered your earnest money into REI Hub, select the Earnest Money Deposit account and enter the amount.
5) Optionally attach an electronic version of the closing statement. Click Save Transaction.
Optional Advanced Tracking
- Capitalized loan closing costs depreciate over the lifetime of the loan - typically 30 years. Since rental property depreciations on a 27.5 year timeline, the property asset and loan asset don't perfectly match up.
- Many investors refinance or sell prior to the end of their initial loan. At that time, you are able to expense any remaining capitalized loan costs - if you have tracked them.
- You will separate out capitalized closing costs that apply to the property asset (title fees and insurance, surveys, recording fees, legal fee, and transfer taxes) and capitalized closing costs that apply to the loan asset (loan origination, processing, underwriting fees, purchased points, appraisals, credit reports).
- The Auto Balance account is a default equity account that is used here to break the property purchase and loan origination into two assets and journals. Using offsetting debits and credits to the Auto Balance account in the two journals nets out to zero while still properly recording all the other information.