Accounting Practices for Rental Properties vs. Flips

[Matthew B.]

I have some fun accounting questions I'm hoping someone can answer.

So I'm pretty sure when I purchase a house to flip, it is recorded as inventory, then expensed as cost of goods sold when the house is sold. All of the other rehab costs are recorded as cost of goods sold as well.

When I purchase a rental, I believe it is recorded as a fixed asset, separated into building and land accounts proportionately for depreciation purposes.

Here's where I have questions. Any improvements done to the property prior to renting it are considered improvements to capital? Total money invested in the property would be fixed assets (land + building) plus capital improvements? Any work done after renting (i.e. fixing the tenant's toilet) would be expenses?

I'm just trying to get some clarification since I've seen a lot of conflicting information. I use Quickbooks Online to keep records and I want to make sure I am recording things properly.

[Steven Hamilton II]

Originally posted by @Matthew B.:

I have some fun accounting questions I'm hoping someone can answer.

So I'm pretty sure when I purchase a house to flip, it is recorded as inventory, then expensed as cost of goods sold when the house is sold. All of the other rehab costs are recorded as cost of goods sold as well.

When I purchase a rental, I believe it is recorded as a fixed asset, separated into building and land accounts proportionately for depreciation purposes.

Here's where I have questions. Any improvements done to the property prior to renting it are considered improvements to capital? Total money invested in the property would be fixed assets (land + building) plus capital improvements? Any work done after renting (i.e. fixing the tenant's toilet) would be expenses?

I'm just trying to get some clarification since I've seen a lot of conflicting information. I use Quickbooks Online to keep records and I want to make sure I am recording things properly.

Matthew,

So far that is correct except one part. You can have improvements after the property is rented.

Improvements are additional assets added to "sub-asset" of the building.

Expenses are repairs and maintenance after the property is ready an available for rent. Now if you replace a furnace, you depreciate the cost of the new furnace of 27.5 years as it extends the life of the house. A repair like fixing a switch is immaterial therefore not worth the cost of keeping that switch on the books.