Seller paid closing costs into escrow

Anthony gnucash at inbox.org
Tue Apr 29 23:46:05 EDT 2008


On Tue, Apr 29, 2008 at 1:56 PM, Dawning Sky <the.dawning.sky at gmail.com> wrote:
>  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
>
Yep, that's what I meant, and that's the way I'd do it.  A real
transaction will likely have other parts to it, of course.  For
instance, the prorated real estate taxes will be listed on the HUD.
That is handled differently.  The above example is if the seller pays
$2000 towards *your* portion of the real estate taxes and insurance.

If you're in the United States, see Publication 530 for more details.
"If you pay any part of the seller's share of the real estate taxes
(the taxes up to the date of sale), and the seller did not reimburse
you, add those taxes to your basis in the home. You cannot deduct them
as taxes paid."  "If the seller paid any of your share of the real
estate taxes (the taxes beginning with the date of sale), you can
still deduct those taxes. Do not include those taxes in your basis. If
you did not reimburse the seller, you must reduce your basis by the
amount of those taxes."  "If the seller actually paid for any item for
which you are liable and for which you can take a deduction (such as
your share of the real estate taxes for the year of sale), you must
reduce your basis by that amount unless you are charged for it in the
settlement."

Now, Mike made a good point about the timing adjustments.  Let's say
the house is purchased April 1, and estimated property taxes are
$2400.  Let's say property taxes are paid in arrears (that's how it
works here in Florida).  This means when you buy the house on April 1,
and the seller will give you 1/4 of the estimated taxes, or $600, *on
top of* any seller-paid closing costs.  This $600 is a liability to
you, so you have to credit a liability account, such as "property
taxes payable".  Generally, I believe this $600 will be subtracted
from your cash settlement due at closing, so it would reduce that
credit.  Now, when you pay the taxes, let's say they're $2400 as
estimated, you'd debit the "property taxes" expense for $1800 and the
"property taxes payable" for $600.  (Unless you wanted to continue to
accrue the payable on a periodic basis, in which case you'll know what
to do.)  Your tax deduction on your Schedule A for that property would
be $1800.  All of this of course only applies in the United States.  I
have no idea if other countries use similar rules or not.

Depending how detailed you want to get it can be quite a lot of work.
If you've looked at Publication 530 you'll see that some settlement
charges get added to your basis of your home, and others are just
non-deductible expenses (a couple are deductible expenses).  And then
there are probably other minor nitpicks like the prorated garbage
collection fee or the fuel in the fuel tank.  If you want to handle
them, it'd go just like the property taxes, except it'd be a
non-deductible expense.  Or you could just credit the expense
pre-emptively instead of using a liability account.

Lemme look at the HUD from the house I just bought.  Purchase price
$181,000 minus $5430.00 seller paid closing costs.  Title charges
$780.50.  Recording & Transfer charges $723.50.  One oddity is that
the seller paid closing costs ($5430) are actually higher than my
closing costs on the HUD ($3993.20), but this is because I paid $1589
outside of closing for hazard insurance (nondeductible expense) and I
was able to convince the closing agent to include this as part of my
closing costs.  Rest is explained below:

Dr Asset:House 181000+780.50+723.50-5430.00 (new asset account)
Dr Expense:Loan Expenses 473 (nondeductible expenses per pub 530)
Dr Expense:Interest 421.23 (interest from closing to end of month)
Dr Expense:Garbage 80.86 (proration for item paid in advance by
seller, nondeductible expense)
Dr Asset:Escrow 1594.97 (new asset account)
Cr Asset:Deposit 5000 (earnest money deposit, which had been an asset
before closing)
Cr Liability:Note Payable 150000 (new liability account)
Cr Liability:Property Taxes Payable 1037.27 (new liability account,
adj for item unpaid by seller)
Cr Asset:Other Receivable 388.00 (repairs to property paid by me and
reimbursed by seller at closing)
Cr Asset:Cash 23218.79 (for cashier's check)

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I'm an accountant and an Enrolled Agent, but I must inform you that
nothing in this email is intended or written to be used, and it cannot
be used, by any taxpayer for the purpose of avoiding penalties that
may be imposed on the taxpayer.
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