Seller paid closing costs into escrow

[Mike or Penny Novack]

>>
>>So, from my "bank account" $20,000 is withdrawn and put to the Asset:House
>> From and Mortgage liability, $180,000 is taken, and put to Asset:House
>>
>>These are both "Fixed items" that have to be recorded as is, or the 
>>books don't balance. So this money the "seller" is paying into escrow 
>>for taxes can't really "reduce" the price of the house.
>>
>>    
>>
>
>It works like this:
>
>                                       Debit           Credit
>Asset:Fixed Asset:House          198,000.00
>Asset:Current Asset:Escrow         2,000.00
>Asset:Current Asset:Savings                        20,000.00
>Liabilities:Mortgage                              180,000.00
>
>You may be unwilling to accept the fact that your house price is 
>actually $198,000.00 if the seller gives $2,000.00 in cash while the 
>contract price is $200,000.00.  But that's just the way it is.  Of 
>course, the market value of your house can be a totally different thing. 
>  Then you'll need to deal with the unrealized gain etc.  But that's for 
>another transaction.
>
>  
>
I'm not sure, which is why we who are not certified accountants have to 
be careful giving advice. There are often adjustments because of the 
TIMING of a real estate transaction or components of the transaction 
that are not "real estate". Most places things like real estate taxes 
are due at certain times of the year (specified dates). In many cases 
the timing of "settlement" is crucial for other reasons (the seller may 
be buying another property and so needs the settlement on this one 
before a certain date).

So say that real estate tax is due May 1st, 2008. We are at April 29th. 
The seller want to settle today, the buyer May 2nd*. To get settlement 
April 29th the seller might agree to pay the real estate tax but that's 
not an adjustment on the basis of the house. There are often a lot of 
other similar money  adjustements at settlement time for things like 
fuel remaining in the oil tank (also not "real estate", a consumable, 
not a fixed asset), balance of time left on the annual fire insurance 
coverage, etc.

My (non-professional) judgment is that an escrow account for a seller 
paid future expense isn't an asset but a liability type account. The 
seller has given you this money to hold (it isn't really yours). When 
you pay that real estate bill as it becomes due you take the money out 
of the bank (write a check) and the other side of that transaction would 
be the escrow account and not YOUR real estate taxes expense -- because 
the seller paid this bill (via the escrow money). But since future tax 
liabilities may be involved, I seriously suggest that you do get 
professional advice.

Michael

* Because of who SHOULD then be responsible for the real estate tax 
bill. However an unpaid real estate tax bill would constitute a lien 
against the property. The town wouldn't go after who SHOULD pay that 
bill but the property itself and leave it to the current owner to try to 
get the money back from the seller. THAT's why this would be handled by 
an escrow payment made at the settlement.