What’s worse than finding out at tax time that your rental property was incorrectly recorded on your books? Realizing that you made important financial decisions based on a set of books that were incorrect! Let’s unravel five common errors to avoid when recording the purchase of your rental property so you don’t waste valuable time and money.
1. The Land Depreciation Misstep
A common misstep is depreciating the land value. Land is not depreciable, and it must be separated from the value of the building when recording the purchase price. If an appraisal is unavailable, use the land percentage derived from the tax assessment to ascertain the land value.
2. Navigating Loan Costs
Loan costs – a mix of origination fees, appraisal fees, and more – often find a place in your closing statement. These costs should be amortized over the term of the loan, not deducted upfront. However, any stub interest paid is generally deductible.
3. Escrow Recording Errors
Escrows, for taxes, insurance, etc., are amounts reserved to pay future liabilities. As such, escrows are recorded on the balance sheet until the future liability is paid (i.e., the property taxes are sent to the taxing authority).
4. Handling Seller/Buyer Credits Prudently
A property purchase may involve credits either to the seller or the buyer, often relating to prepaid or pending taxes. If you, as the buyer, are crediting the seller for amounts paid by them in advance, the credit should be reported as an additional expense. If you are being credited for amounts unpaid by the seller in advance, the credit should reduce your expense.
5. Deposits – A Key Player
Most, if not all, real estate transactions involve an earnest money deposit. At the time the deposit is paid, record it on the balance sheet as an asset. Upon closing on the property, the deposit amount should be adjusted to zero when recording the closing statement.
Accurate recording of your rental property transactions doesn’t have to be a hassle. If recording your own closing statements seems daunting, team up with Elblein CPA – your trusted partner in demystifying real estate accounting, letting you focus on what you do best!