Accounting for Closing Costs?

Accounting for Closing Costs?

Contractor · Dallas, TX · Member since 2020 · 8 posts · 4 votes

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!

0Reply
296 views

Most Popular Reply

Ashish AcharyaBusiness Member
CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
5y
Originally posted by @Katie Anderson:

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!

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. 

 

INVESTOR FRIENDLY CPA®5241 Reviews
TaxMD® | AI-Powered Tax Planning
See this reply in the discussion

9 Replies

Jump to latestLatest
  • Spring Lake, NJ · Member since 2017 · 1 post · 0 votes
    5y

    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...

  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
    5y
    Originally posted by @Katie Anderson:

    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!

    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. 

     

    INVESTOR FRIENDLY CPA®5241 Reviews
    TaxMD® | AI-Powered Tax Planning
  • Accountant · Albuquerque, NM · Member since 2019 · 43 posts · 30 votes
    5y

    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.

  • Simon W.Business Member
    Real Estate Consultant · Lehigh Valley PA & New York City · Member since 2013 · 1k+ posts · 662 votes
    5y

    @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.

    Accounting Properties LLC
    View Page
    CFO LLC
    View Page
  • Basit SiddiqiBusiness Member
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
    5y

    @Katie Anderson

    Interesting 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 property
    Some items are currently expensed
    The 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, etc
    Items that are currently expensed - if you pay real estate taxes or home owners insurance at closing

    Good luck!

  • Real Estate Consultant · Norfolk, VA · Member since 2017 · 345 posts · 201 votes
    5y

    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. 

  • Rental Property Investor · Oklahoma City, OK · Member since 2017 · 1k+ posts · 694 votes
    3y
    Quote from @Katie Anderson:

    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!

    what type of project are you doing? Buy and hold or flip?
    and are you referring to escrows, or title/lender fees? 

    I always hate talking to my attorney because their answer always seems to be “it depends”, haha. But that is my answer here. Some costs are acquisition costs, others are escrows, etc. 

    *I am not a CPA


  • Investor · Austin, TX · Member since 2021 · 9k+ posts · 5k+ votes
    3y

    Write those off as expenses 

  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    3y

    @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.

    7e investments53 Reviews
Join the conversationCreate a free account to reply, vote on answers and follow this thread.