Entering Mortgage Closing Costs for Depreciation

[Christopher Singley]

This is all essentially correct.  IRC dictates that these expenses be
capitalized (this is largely to mitigate games played by buying down the
rate with "points" &c.) So these costs are treated as an amortized asset,
similar to a prepaid expense.

Technically the asset account here isn't a subaccount of the RE asset -
it's other asset, like a startup cost - and I would just call it "closing
costs" ("amortized expense" sounds like a contra account holding
accumulated depreciation).

The expense account is technically amortization not depreciation, and
depending on your tax reporting situation your CPA will be happier if you
chop this out into a separate line item.

If you don't have a CPA, get one now & show them these transaction details
as part of the interview.

Usual disclaimers : I'm not a tax professional, and definitely not YOUR tax
professional.  Free advice is worth what you paid for it, but some free
software is worth a lot more.

Good luck, and do indeed brush up on your accounting & taxes, it's valuable
knowledge.
 On Nov 28, 2013 5:11 AM, "John Ralls" <jralls at ceridwen.us> wrote:

>
> 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
>
>
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