GAAP - Chart of Accounts - Down Payments

[Matt P.]

I'm creating a Charter of Accounts for our new buy & hold business.  I'm obviously not an accountant but I'm trying to follow GAAP practices so my P&L and Balance Sheets look solid for the bankers...

What type of account is the correct choice for the Chart of Accounts "Down Payments?"  To be clear, I mean the down payment money we spend when we purchase a property.

• Asset - NO
• Cash - NO
• Liability - NO
• Capital - ?
• Income - NO
• Expense - ?

Expense Accounts show on P&L.  Capital Accounts show on Balance Sheet.  So my guess was Capital Account.

I have the same question on Rehab expense.  Is that Capital Improvements?

Thanks

Matt

[Account Closed]

Down payments would go into the basis of the asset your purchase. Rehab expenses would be depend on what you were rehabbing how much was the rehab and whatever other accounting policies you have related to capitalization.

Most people try to stay away from GAAP unless it's are a large company. It is just easier to use tax basis accounting to produce a F/S that most banks will accept. 

[Matt P.]

Thanks Tim, much appreciated.  I apologize for this being so 101 :/  I've been a non-real estate business owner since 1999 & I used QuickBooks single entry. Now I'm using Appfolio double entry accounting so more complicated.  It seems that I should create the Journal Entry from the HUD1 data.   A couple BP Podcasts recommended updating Fair Market Value quarterly to track net worth.  Sounded wise so I wanted to track with an Asset Account so it lands on my balance sheet.  As I pay the mortgages, I offset the Principal Balance Liability Account per property & we'll have updated net worth for an ongoing basis.  Simple right? Not so much LOL  Getting the JE in balance has me stumped.  I made this little excel sheet since a pic is worth a thousand words...

[Blake Meester]

@Matt P.

It looks to me like you are trying to book the purchase and account for the FMV in the same entry… Are you trying to post the JE to track the property purchase for financial/tax purposes of for your own net worth calculations? There are a few methods that you can keep your books on (GAAP, cash basis, tax basis, etc.) and each has its purpose, so you will need to pick one method to establish the books. I would recommend cash or tax basis for most rental activity.

A more standard approach to the JE would be to keep you books tax basis and then have a separate spreadsheet to track the FMV or unrealized appreciation/loss on the property. In tax, we do not generally mark up the asset value to market, the asset is carried at cost.

I will work up an example and post a picture in the next post.

[Matt P.]

Blake, CHICO!  Small world.  Do you know Brian Hood?

Yeah, I know it's unorthodox to track FMV on the balance sheet. just thought I could kill two birds with one system. The intent was to show the bankers that we buy at wholesale so we can get more funding.

[Blake Meester]

[Blake Meester]

It is a small world, I see you are only an hour or two away from Chico. I don't recognize the name... 

Back to the post... I would recommend that you post the cost to the balance sheet and have a "normal" set off books. Separate of that you could create a spreadsheet to show the Asset-Liab=Equity and then add a FMV figure.

This way the banker will see a balance sheet they can run metrics off of and  then separately consider your valuation. I would guess they wont put too much stock in how you value the project as they will likely want an independent appraisal of some sort.

A good set a books is the place to start.

[Matt P.]

That will make it a lot easier. 

Is it recommended to group building & closing costs in the same account for a particular tax reason or can they be tracked separately?

I really appreciate your help.  Let me know if you ever have any HR, safety or insurance questions.  I'm a partner in a national firm.  Happy to repay the favor. 

[Blake Meester]

I appreciate the offer.

I would track them in the same account because, for tax purposes, they are the same. An example would be that you can sell the closing costs without the property, the tack with the property. That being said, I don't think anyone would blink if there were two asset line items.

Keep the reader of your financial statement in mind. who is the user? What is the purpose of the F/S? What is the reader used to seeing? Wow will they use the financial statement? 

You want to make it easy for them to run their numbers and ratios.

Happy banker = $ 

Good luck!

[Matt P.]

Makes perfect sense.  Thank you!