QuickBooks - Using the “Cost of Goods Sold” account type

[John T.]

I am a landlord who manages my own rental property. I do not manage property for other owners. I set up my chart of accounts in QuickBooks to include, among others, two types of accounts: (1) Cost of Goods Sold accounts and (2) Expense accounts. I use the "Cost of Goods Sold" account type as a substitute for "Property Costs," meaning all costs specifically related to the rental properties, including, but not limited to, property repairs & maintenance, property taxes and property insurance. I use the "Expense" account type as a substitute for "Overhead Costs," meaning all non-property specific costs of operating the business, including, but not limited to, office expenses, office supplies, office telephone, office internet and postage. Each rental property is a separate Class (as well as a separate Customer; Tenants are Jobs).

When I run a Profit & Loss Report, the general categories that appear in the report are Income, Costs of Goods Sold (Property Costs), Gross Profit, Expense (Overhead Costs), Net Ordinary Income and Net Income (The words “Property Costs” and “Overhead Costs” do not actually appear in the report).

Using the “Cost of Goods Sold” account type as a substitute for “Property Costs” works wells for me. However, I am not a tax lawyer or a CPA. My questions are: Does anyone else in the rental property business use the "Cost of Goods Sold" account type as a substitute for "Property Costs?" Are there likely to be any unintended consequences in using the "Cost of Goods Sold" account type as a substitute for "Property Costs?"

[Account Closed]

The COGS Account is used when you flip a house.  It is at this time that you can add all your expenses (Capital Gains, any expense that adds value to the home) as a Fixed Asset Account.  When the house is done with all the necessary repairs, (WIP Work in Progress)  you would then take the total of the Fixed Asset Account (WIP) and transfer it to the Cost of Goods Sold Account.  

The COGS Account subtracts all the cost of the home, including the price you paid for the home, from the Selling Price of the home giving you a New Profit which you will be taxed on.  

Let's say you purchased a home for $35,000.00, and you put $20,000.00 into the house to upgrade it.  Total investment into the property is now $55,000.00.  

You sell the home for $100,000.00 6 months later.

Well, you certainly don't want to have to pay taxes on $100,000.00 for this home, because you didn't really make $100,000.00 profit.  You had expenses.

So by using the COGS account, QuickBooks will automatically deduct the $55,000.00 from the sale of the house leaving you with a more accurate profit of $45,000.00, making this figure what you will have to pay taxes on, as it is this figure that will show up as your Net Income for this house.  

For landlords who don't flip their homes, all expenses you pay out to fix up your homes are Expense Accounts.  Some are Capital Gain accounts, like hot water heaters, furnaces, big time stuff, but nothing more. 

You get to claim those expenses on your tax return.  Your CPA knows how to achieve the best results of your tax returns.  Just provide them with accurate records and let them do their thing. 

But for you to use a COGS account is a no no UNLESS you flip.

Nancy Neville