Is Accounting For Real Estate Investors Complicated?

Real estate investors face complex accounting challenges due to their involvement in various activities such as flips, rehabs, wholesaling, 1031 exchanges, installment sales, syndications, trust fund accounting, and managing parent-subsidiary companies. Each property transaction requires careful accounting, including the use of settlement statements to accurately track the property’s basis, settlement costs, and closing costs.

Certain fees and costs associated with acquiring a property are added to its basis. These may include:

-abstract fees,
-utility service installation charges,
-legal fees, surveys,
-transfer taxes, owners’ title insurance, and any expenses the buyer agrees to pay on behalf of the seller, such as improvement costs, repairs, or sales commissions.

Real estate taxes paid by the buyer that were owed by the seller also increase the basis of the property. If a buyer assumes an existing mortgage, the basis includes both the cash paid for the property and the amount of the assumed mortgage.

-Constructing assets, demolition costs, and rehabilitation costs can also increase the basis of a property, although any rehabilitation credits allowed for these expenses must be subtracted.

The term “basis” refers to the cost basis of real property or real estate, which encompasses land and any structures or improvements on it. It is crucial to accurately determine the basis of a property for proper accounting.

When assets are purchased with mortgages, annual mortgage statements are requested to track the principal and interest breakdown for each monthly installment. The interest portion of these payments can be deducted as a legitimate business expense. Similarly, for business vehicles, annual interest statements are obtained to facilitate the deduction of interest on the payments made.

To illustrate, if a color copier costs $3,000 for business use, and the buyer receives a $200 rebate, the basis of the asset would be reduced to $2,800 ($3,000 – $200).

In another example, a property development company purchases a 100-acre tract of land for $1.5 million. Subsequently, the company faces a legal dispute related to the property’s title and spends $80,000 on legal fees to resolve the matter. These legal fees incurred to defend or protect title would be added to the basis, resulting in an adjusted basis of $1.58 million ($1.5 million + $80,000).

Accounting for real estate investors also involves tasks such as journal entries, expense categorization, generating monthly, quarterly, or annual financial reports, and understanding the nature of each transaction before recording it.

Various costs can either increase or decrease the basis of business property. Costs such as extending service lines, impact fees, legal fees for defending and perfecting title, zoning costs, and government assessments for infrastructure improvements increase the property’s basis. On the other hand, deductions for amortization, depreciation, Section 179 expenses, depletion, residential energy credits, vehicle credits, amounts received for easements, and certain canceled debt excluded from income can decrease the basis of the property.

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