Accounting for Closing Costs?

Question

How do you account for closing settlement charges and expenses such as escrow fee, title insurance, wire/notary fees, recording fees, items payable in connection with a loan (on the seller side), appraisal fees, etc... Do you itemize these various items under insurance, legal/professional fees, bank fees on your COA or do you book these as direct costs of goods sold? Is there a reason to keep these off the individual project/investment proforma and put in overhead expenses; or should the opposite argument be made?

Thank you!

Ashish Acharya · Answer

Loan cost are capitalized and amortized over the term of the loans. So from accounting perspective, an intangible asset is booked.

Escrowed amount are not deductible or capitalized for taxes and booked against equity.

Most of the settlement charges are added to the basis of the property and booked as building and land.

Chris Seveney · Answer

@Katie Anderson

Some really bad advice in this column - especially from those not cpa or accountant. I recommend listening to them and my recommendation is to always send your closing disclosure (hud-1) to your accountant and they can properly itemize it.

Cara Powers · Answer

As @Ashish Acharya has said, all of those things you mentioned have a proper treatment under Generally Accepted Accounting Principles and tax law. If you give the settlement statement to your tax accountant or a knowledgable bookkeeper, they can book them for you and explain each individually.

Eliott Elias · Answer

Write those off as expenses

Alyssa Dyer · Answer

*I am not a CPA

Dan V. · Answer

The way you book items in the closing statement depends on your RE investing strategy (flipping, buy & hold, wholesaling, etc.). Also, the closing statements format vary, so depends on what items are under closing costs, some of them need to go to balance sheet while some go to income statement. For example, interest, property tax and property insurance are booked as expense for buy and hold but "holding cost" (asset) for flippers.

Basit Siddiqi · Answer

@Katie AndersonInteresting to see the differing in answers above.It depends on the type of expense that you are paying at closing.Some items are capitalized into the cost of the propertySome items are currently expensedThe other items are escrow payment which don't get added to cost of basis or currently expensed.Items that would be added to cost of property - title work costs, stamps, etcItems that are currently expensed - if you pay real estate taxes or home owners insurance at closingGood luck!

Simon W. · Answer

@Katie Anderson Closing Costs are not typical operational expenses. I was a Developmental Controller as well as other sectors of real estate, these costs will be in the balance sheet and not the income statement. Please consult with a CPA/Consultant/Bookkeeper preferably in real estate.

David Ackerman · Answer

I'm a newbie (albeit with 30 years of accounting under my belt) but my two cents...  I don't see any of those as overhead.  They are transactional expenses directly related to the obtaining or disposing of the property and definitely should not be included in the COA.

Everything you listed there is germane to the project you are working on. If you are going to analyze the profitability of a deal you would want to isolate all of those items to obtaining that deal and not comingle with other operational costs.

I also feel if you present a pro-forma, everything you mentioned above is part of the cost to obtain the unit and should be attributable to your investment basis.  After your costs to obtain, your proforma would deal with the regular operating income/outflow... inclusive of taxes/insurance/maintenence/management/vacancy, etc...

Like I said...

Just my two cents...

But I hope this helps...

Accounting for Closing Costs?

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