How to enter a recent property purchase in REI Hub

How to enter a recent property purchase in REI Hub

This guide details how to properly account for a rental property purchase in REI Hub using your closing statement. For more context on the subject, also check out this resource article.

This is an important transaction, as it sets the property's basis and therefore it's depreciation schedule.  If you work with a CPA or tax preparer they may plan to handle it on your behalf; in which case you may choose whether or not to enter this information into REI Hub.  

These instructions are specifically for properties purchased in the current accounting period.  When you created your REI Hub Portfolio, you set a bookkeeping start date so anything after that date is in the current accounting period.  Your bookkeeping start date is generally January 1st of the first year you are using REI Hub for, or your transition date from another accounting system. 

Properties purchased prior to the current accounting period, or that you have already filed taxes for after the purchase, are handled differently.  Their basis and depreciation schedule will have already been established, so you want to match that instead of calculate it all again.  For these properties, we suggest you create the property fixed asset and enter opening balances for the Land, Buildings, and Accumulated Depreciation accounts. 

Disclaimer: this article is not a substiute for professional tax advice from someone familiar with your financial circumstance and locality.

Step One: Add the required accounts to REI Hub

In the REI Hub system, creating a fixed asset account sets it's characteristics, such as asset type and useable life.  The fixed asset account will then be populated by the property journal entry to set the balances.

Additionally, you will want to have any relevant bank or loan accounts set up before entering your journals.  

A) Create a fixed asset account for the property purchase. 


For the details of this fixed asset account: 
  1. Select 'A Property' from the first screen.
  2. You can name it as desired, but we suggest calling it 'Property Purchase of 123 Main St.'
  3. 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.
So now we have created the fixed asset account with the correct characteristics, and it is ready to be populated with a journal entry to define the values.

Did you purchase the property in cash?  If so, skip ahead to Step Two.  If you financed your property, read on.

B) Create another fixed asset account for your loan. 

Why?  Because most costs associated with getting a loan must be capitalized, instead of deducted immediately as expenses.  These costs must be tracked separately from the property fixed asset, as they are depreciated according to the length of the loan.  Since 27.5 year mortgages aren't easily available, your loan and property depreciation schedules just won't add up.

This benefits you if you pay off the property, sell, or refinance prior to the end of the loan.  At that time, you will be able to expense any remaining capitalized loan costs.

For the details of this fixed asset account:
  1. Select 'Something Else' from the first screen.
  2. Select 'Loan Closing Costs' from the dropdown
  3. Set the Useful Life to be the same as the length of the loan (so 30 years for a 30 year mortgage).
  4. You can name it as desired, but we suggest calling it 'Loan Costs 123 Main St.'
  5. The same placed in service date (or blank) as above.
One additional note- if you received any sort of rebate on your loan in excess of your loan closing costs- then you have nothing to depreciate and therefore a second asset and journal entry are not required.  See the example below of a property purchase journal entry with loan, but no separate asset.

Is creating a second fixed asset and journal entry for the loan required?  It is to fully account for the capitalized loan costs in REI Hub.  If you only enter one consolidated asset and journal entry, you will miss out on the opportunity to depreciate (and later potentially expense) those costs.

C) Ensure that the loan or mortgage account has been created properly.

You will need to reference the appropriate loan (and escrow, if applicable) accounts in the journal entries. The journal will set the opening balance for the loan, but the account still needs to be created first.

If not already created, set these accounts up from the Loans page (not the Chart of Accounts) for correct property and account linkage, as well as the Loan Payment Template.

Step Two: Determine the necessary values from your closing statement.

This is the part where you need to directly reference your closing statement. Don't be intimidated by the number of line items on the closing statement- many of them will be combined or consolidated in your journal entries.  

A) Determine your Effective Price.

This is the purchase price you paid, less any seller credits.  Look at your closing statement, and subtract any seller credits from the listed purchase price to calculate the Effective Price.

B) Determine the initial Buildings/ Land split.

Property basis includes both Land value, which is not depreciable, and Buildings (/Improvements), which is depreciable. This information is present on your 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.  

Calculate your initial Buildings/ Land values by multiplying the effective price by the same ratio as the tax assessment.  The result is your Buildings value, with the remainder going to Land.  Buildings and Land are existing accounts within REI Hub- you will enter each as separate debits in the journal.

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.

C) Determine your capitalizable 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.  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 and sum them together.  These will be collectively debited to the Capitalized Closing Costs account.  

D) Determine tax deductible closing costs

While many closing costs are capitalized, others are tax deductible expenses that will flow through to that year's Net Income and Schedule E.  These costs can include property taxes, property insurance, HOA assessments, and prepaid mortgage interest (assuming a financed property purchase- this expense will be reflected in the loan journal).  These expense accounts all already exist in REI Hub, with the exception of HOA (which can be created as a sub-account of Other). 

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.  

You will have one value per tax deductible expense account to go in the journals.

E) For financed properties:

First, determine capitalizable loan costs.  Most costs associated with obtaining a loan should be capitalized, including loan origination, processing, underwriting fees, purchased points, appraisals, credit reports, etc.

Sum up these costs, they will be debited in the loan journal as Capitalized Closing Costs.

Second, determine the amount of escrow transfer or prefunding (if applicable).  You don't need to worry about any individual line items here- if present, they are estimates.  The total transfer or prefunding will be debited in the loan journal.

F) Determine direct investment values

These are the final values you need for your journal entries, and should be the easiest to determine.  These are the funds being used to purchase the property.  All of these amounts will go into the appropriate journal as credits.

First, find your cash at closing value.  Second, find the value for any earnest money deposits.  Third, if the property was financed, find the total loan value.  


Step Three: Create the journal entries

Below are three separate journal templates based how you purchased the property and what assets you wish to track. Choose the appropriate option for your situation, enter the journal(s) as indicated with the values determined above, and then check out Step Four for more information.  The options are:
  1. Financed property purchase with separate loan asset
  2. Financed property purchase without separate loan asset
  3. Property purchase in cash

A) Financed property purchase with separate loan asset

First, a note on the Auto-Balance account.  This 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. 

PROPERTY PURCHASE JOURNAL
Go to the property purchase fixed asset account you created earlier.  Click Add Transaction in the upper right corner, and select Manual Journal.  In the journal details, add a description and the closing date.  

Add your debit lines with the values determined above and the relevant accounts:
  1. Buildings
  2. Land
  3. Capitalized Closing Costs
  4. Taxes (if applicable)
  5. Insurance (if applicable)
So the debits side of your manual journal in REI Hub will look something like this:
 
Add your credit lines:
  1. Cash at closing- select either the bank account the funds originated from or the Owner Funds equity account
  2. Earnest money deposit- select the bank account you paid the deposit from.  If you have not previously recorded the deposit, you can instead select the Owner Funds equity account
  3. Auto-Balance- this is calculated based on the other lines you have already added.  Sum the debit lines and subtract the credit lines, enter the result credited to the Auto-Balance account
So the debits side of your manual journal in REI Hub will look something like this:


At the bottom of the journal entry screen, you have the option to add a file (such as an electronic copy of your closing statement!) or image and associate it with the transaction.  Your closing statement is a primary source of property information, and is an important record to maintain.

And finally, click Save Transaction.   Check out Step Four for more information about depreciation and tax time!

LOAN ORIGINATION JOURNAL
Go to the loan fixed asset account you created earlier.  Click Add Transaction in the upper right corner, and select Manual Journal.  In the journal details, add a description and the closing date.  

Add your debit lines with the values determined above and the relevant accounts:
  1. Loan Capitalized Closing Costs
  2. Prepaid Mortgage Interest (if applicable)
  3. Initial Escrow Transfer or Prefunding (if applicable)
  4. Auto-Balance- using the same value as entered in your property purchase journal
Add your credit line:
  1. The total loan amount, credited to the appropriate loan account.
Optionally include a file, and click Save Journal Transaction. Check out Step Four for more information about depreciation and tax time!

B) Financed property purchase without separate loan asset

PROPERTY PURCHASE AND LOAN ORIGINATION JOURNAL
Go to the property purchase fixed asset account.  Click Add Transaction in the upper right corner, and select Manual Journal.  In the journal details, add a description and the closing date.  

Add your debit lines with the values determined above and the relevant accounts:
  1. Buildings
  2. Land
  3. Capitalized Closing Costs
  4. Taxes (if applicable)
  5. Insurance (if applicable)
Add your credit lines:
  1. Cash at closing- select either the bank account the funds originated from or the Owner Funds equity account
  2. Earnest money deposit- select the bank account you paid the deposit from.  If you have not previously recorded the deposit, you can instead select the Owner Funds equity account
  3. The total loan balance- select the appropriate loan account
Optionally include a file, and click Save Journal Transaction.  Check out Step Four for more information about depreciation and tax time!

C) Property purchase journal for a cash purchase

PROPERTY PURCHASE JOURNAL
Go to the property purchase fixed asset account.  Click Add Transaction in the upper right corner, and select Manual Journal.  In the journal details, add a description and the closing date.  

Add your debit lines with the values determined above and the relevant accounts:
  1. Buildings
  2. Land
  3. Capitalized Closing Costs
  4. Taxes (if applicable)
  5. Insurance (if applicable)
Add your credit lines:
  1. Cash at closing- select either the bank account the funds originated from or the Owner Funds equity account
  2. Earnest money deposit- select the bank account you paid the deposit from.  If you have not previously recorded the deposit, you can instead select the Owner Funds equity account
Optionally include a file, and click Save Journal Entry.  

Step Four: About depreciation entries and tax time tips

Congratulations!  You have just set the depreciable and non-depreciable basis of your new investment property and set up your loan starting balance.  Your Balance Sheet is now more accurate, and you are set up for tracking depreciation on your fixed assets. 



A) Depreciation entries are not automatically calculated or created on your behalf.


It is also possible to make general, uncategorized depreciation entries.  However, if you have gone through this process to set your property basis, you will most likely be entering asset by asset depreciation.  Uncategorized depreciation entries are primarily utilized when the investor is not directly managing their fixed assets, and receive a single consolidated depreciation entry from their CPA or tax preparer that encompasses all of their assets. 

B) You must prorate the depreciation entry for the year in which you purchased the property

The IRS allows you to claim depreciation beginning with the month the property is placed in service.  For the first year of ownership, you can only take a prorated portion of your standard annual depreciation, depending on the month it was placed in service.  

For a property with a standard 27.5 year useful life, evey year except the first and last you will take 1/27.5, or 3.636%, of the total depreciable value.  The IRS provides the below table (Table 2-2d in pub 527) to help you calculate your first year depreciation.  Multiply the total depreciable basis of the asset by the appropriate value below for your prorated depreciation for that asset.



C) View the Fixed Asset Schedule for a summary of your fixed assets

The Fixed Asset Schedule provides a breakdown of all of your fixed assets and balances.  It also provides a Recommended Annual Depreciation entry per asset.  This is a calculated value based on the information in the system provided.  It follows the below logic, and may not be correct in all circumstances.  Depreciation entries are not being made on your behalf. 

The Recommended Annual Depreciation amount is calculated on a straight line basis using the usable life of the asset.  If the Date Placed in Service has been filled out and it was in the current accounting period, the amount will be prorated based on the mid-month convention.  If no Date Placed in Service has been entered, or it was prior to the current accounting period, the full annual amount will be displayed.

You can also access the Fixed Assets page on the left hand menu (under Accounts) to quickly view and jump into any of your fixed assets.

Please reach out to us with any questions or for assistance!


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