Entering Mortgage Closing Costs for Depreciation

[John Ralls]

On Nov 27, 2013, at 8:34 AM, Tim7621 <tim7621 at aol.com> wrote:

> Hello,
> 
> I have created a GnuCash account for a commercial rental property held in a
> LLC.
> Here are the numbers (rounded for simplicity):
> The building purchase price: $163,000. 
> Loan amount: $136,500
> Money brought to closing: $34,000(26,500 down payment, 500 prop. taxes,
> 7,000 closing cost [that must be added to the basis and amortized])
> 
> Under Equity, I created an account to show money brought to closing
> ($34,000)
> Under Assets, I created an account 'Building' to show building value -
> $163,000
> Under Liabilities, I created an account to show the loan amount - $136,500
> 
> My questions:
> 1. Where do I enter the closing costs (presently, I have it shown under
> Liabilities, in an account to show the closing costs - $7,000, but I'm not
> sure if this is correct)
> 
> Next question is concerning depreciation:
> I found the following example of how to depreciate office equipment:
> 
> /You bought a computer with a high speed processor, extra memory, and disk
> space, for
> $3000, to serve as your small business server. Let us walk through how you
> will account
> for the purchase of the capital asset initi ally and how you will account
> for the depreciati on
> expense each month:
> 1. Create a new account called Offi ce Equipment with Account Type as Asset
> and
> Parent Account as Assets.
> 2. On the date of purchase make an entry showing an Increase of $3000 in the
> Offi ce
> Equipment account and select the Checking Account in the Transfer column.
> 3. We are going to apply a straight-line method of $50 depreciati on per
> month over
> the 60 month period. This is just an example. More details follow in this
> secti on
> about what depreciati on rates are allowed by tax laws. On the last day of
> the month,
> create a transacti on in the Expenses:Depreciati on account showing an
> expense of
> $50 and select the Offi ce Equipment account as the Transfer account/
> 
> My issue with depreciating the building is my depreciation schedule isn't
> based on the total asset value ($163,000). I can only depreciate the
> building value $146,700 (value of building minus land) plus the closing
> costs $7,000, for a total of $153,700. 
> 
> 2. How do I show reconcile this difference?
> 

Closing costs is an asset, not a liability. Liabilities are things you must pay back and you’ve already paid them.

I’m not an accountant and you should probably pay for specific advice from one to be sure that you get this right.

I suggest that you redo the CoA as follows:

Assets
  Real Estate
    Land
    Building
    Amortized Expense (i.e., closing costs)
  Cash

Expense
   Depreciation
   Interest Expense
   Tax Expense
      Property

Liabilities
   Real Estate Loans

When you do your taxes each year, after calculating the depreciation expense you can allocate it in two splits, one to Building and the other to Amortized Expense. If there’s additional amortization of the closing costs beyond depreciation, you would create a second expense account, “Amortization” to collect it, balanced agains Amortized Expenses.

It could be argued that Amortized Expense belongs in Equity, but I think it’s easier to keep it together with the other Real Estate accounts, and it’s on the same side of the balance equation either way.

Your purchase transaction will have the following splits, assuming cash accounting:
    Account						Debit		Credit
    Assets:Real Estate:Land				 $16,300
    Assets:Real Estate:Depreciable:Building		$146,700
    Assets:Real Estate:Depreciable:Amortized Expense	  $7,000
    Liabilities:Real Estate Loans                                       $136,500
    Assets:Cash								 $34,000
    Expense:Tax Expense:Property  			    $500
    
Regards,
John Ralls