[GNC] A question on loans

[David Cousens]

Mark,

Your property is an asset which you own hold and control. The connection
between it and the liability that the loan represents is established at the
time you took out the loan. From that point forward they are treated
separately in accounting.

Changes in the details of the loan do not affect the asset only the
liability. So the change to a line of credit is reflected totally in the
liability account for the loan. The only time the loan and the asset might
interact in the future is in the event of foreclosure of the loan. The
difference between the asset's current value and the outstanding loan amount
does however give you an estimate of your equity in the property

The only things which will affect the value of the asset are things like
changes in property values in the area, depreciation and market forces.
However these events are not realized until the property is actually sold.
If you have reliable estimates of these changes you can certainly record
them. A common procedure is to record the initial purchase value of the
asset in a subaccount of an overall placeholder account for the asset and
record any unrealized changes in a contra account. The account structure
will look something like:

Assets:Fixed Assets:Condo
Assets:Fixed Assets:Condo:InitialPurchase
Assets:Fixed Assets:Condo:Improvements                     capital
improvements to the asset
Assets:Fixed Assets:Condo:UnrealizedValueChanges

You would need a corresponding account under equity

Equity:Condo:UnrealizedValueChanges

If you make a capital improvement to the property the recording will look
like

Assets:CurrentAssets:Bank                          Cr xxxxx
Assets:Fixed Assets:Condo:Improvements    Dr xxxxx

If you are recording an increase in the property's market valuation

Assets:Fixed Assets:Condo:Improvements    Dr yyyy
Equity:Condo:UnrealizedValueChanges         Cr yyyy

and similarly a decrease in market valuation

Assets:Fixed Assets:Condo:Improvements    Cr yyyy
Equity:Condo:UnrealizedValueChanges         Dr yyyy

If you are spending money on the property but it is for consumables which
don't add to its long term property value  you would record the expenditure
as an expense as normal. The unrealized value changes would not be subject
to taxation in most jurisdictions (but not all). 

*DISCLAIMER: The above is only a generic illustration of how you could
record such transactions in GnuCash and should not be construed as advice on
how best to record for your jurisdiction. You will need to consult a local
accountant for specific advice relevant to your particular situation.*

Should you sell the property, then you would have to apply a reversal of the
total current balance of the unrealized value changes (it may be positive or
negative if the market has dropped) cancelling that balance contribution to
the assets and equity and then record the actual sale of the property for
the actual sale value including the paying out of the residual mortgage
value.  Alternatively you can do a correction to the unrealized value
changes to bring the total value of property to the sale price. This will
give you the actual gain or loss on the property for any capital Gains Tax
purposes if needed. If your jurisdiction applies gains and losses from
market value fluctuation, the calculations are much more complex and you
will need to apply your applicable taxation legislation and your accountant.


David Cousens 



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David Cousens
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