Accounting Question for you CPAs.
So I recently purchased a rental unit and am just starting out. I have one asset (single family home). I do not use any accounting software at the moment as it is just one unit. It may be easier if someone had a basic example they could share but here is my Income Statement question.
Revenue is clear as that is just your rental income or other revenue generators but I don't have anything else.
Expenses Example: For simplistic purposes let's say the house cost $100K. I put $25K as a down payment. The monthly mortgage payment is $500 a month. $300 or repairs and maintenance.
My current assumptions:
- The $25k down payment is not an income statement expense as that is capital investment and would hit the balance sheet.
- The $75k remaining on the house is also just a PP&E item in the balance sheet that gets reduced by depreciation over time.
- The $300 of repairs and maintenance should be expensed.
- The $500 should be split into 1) Principal ($300), 2) Mortgage Interest ($150), 3) Escrow/Taxes & Insurance ($50).
- I assume the $300 of principal would only impact the balance sheet and not the income statement.
- I think the Mortgage Interest $150 and Escrow/Taxes & Insurance of $50 would be on the Income Statement as they are expenses that are not capital in nature?
Am I missing something here? What other basic income statement items should I be considering as it relates to the house (asset) purchase?
You've got it pretty well down. My only nit to pick would be on the escrow payment. Yes, technically the escrow is for taxes and insurance, but in reality it's a checking account.
In the event that you refi your mortgage, that escrow balance comes back to you because it is essentially your money held at the mortgage holder's office.
When I'm doing accounting, I transfer the escrow portion into a separate "checking" account. Then, when the taxes and insurance are paid out of escrow, I record a "check" for those amounts.
Your escrow balance is set up to always have a higher balance in it than the insurance and taxes, so recording the entire escrow balance as an expense is always going to overstate those expenses. Or you're constantly doing adjustments at year end for taxes.
Other income statement items:
Essentially, just pull a copy of a Schedule E from the IRS website and copy those categories.
Balance Sheet items will be:
@Justin Klein I would add that you could actually list the house as a $100k asset on the balance sheet, and the remaining $75k as a note payable that gets reduced by the principal portion of your mortgage payment. The $100k asset is what gets reduced by depreciation, not the $75k balance.
As it relates to the money brought to closing on the investment house that are one time expenses like: Appraisal Fee, Origination Costs, other costs brought to close, and Real Estate Agent fees. Are these expenses that would appear on the income statement and should be broken out on their own?
@Justin Klein You're welcome - happy to help!
For rental property, those additional one-time costs you referenced would not be income statement items - some would be added to the cost basis of the property (like the appraisal fee), others would be amortized over the life of the mortgage (like the loan origination costs). If you're creating a P&L by property for your own usage, you can certainly list those items as expenses. From a tax standpoint, though, it doesn't quite work that way.
Per @Linda Weygant 's suggestion, let the Schedule E be your guide.
Since your questions are directed to "CPAs"
My answer might be wrong.
$100k would be building/land
$5k closing cost (balance sheet)
$75k Mortgage Payable (liability)
$30K ($25k down payment + $5K closing cost)
Escrow Tax is a balance sheet item, not the income statement.