3. Accounting Wrap Up
At this point you have introduced yourself to almost every key concept in Accounting. There’s more to know, obviously – but if you can master only what you’ve learned to this point, you will be golden. Remember, you are not trying to be an Accountant – you are simply trying to do the following:
- master the ability to have meaningful conversations with your accountant, and
- build your business smartly by considering tax and accounting consequences from day one.
You should be able to properly categorize any business transaction into one of the 5 key categories.
Let’s consider hypothetical financials from the following scenario…
- ABC LLC buys 10-unit apartment building on Sidd St.
- Purchase Price $1.6 million.
- Purchase date 1/15/07.
- There are three LLC members, each contributing $15,000 cash on 1/15/07.
- The Building is fully occupied and generates $1500 per unit in rental income, per month.
- Deposits have been collected from all tenants and were transferred in the Escrow.
- The Apartment building incurs the following expenses each month:
- Lanscaping is $150 per month.
- Water $350 per month.
- Insurance: $270 per month.
- Property Tax: $1000 per month.
- Property Management: $1500 per month.
- Pest Control: $100 per month
- The Building is sold on 11/1/09 for $800,000.
What other expenses are missing, if any?
What will the annual depreciation expense be? Can you make any recommendations regarding depreciation?
Sketch out the Income Statement, Balance Sheet, and Cash Flow Statement
What types of income are earned here?
Post your ideas below…
Tax & Accounting for Real Estate 
11/26/2009 at 9:33 PM |
A couple of items missing under the expenses might be:
1. Interest from the debt service
2. Repairs and maintenance
3. Sometimes Waste Management costs if it is not included in the monthly rent
4. How about a line item for loss due to vacancy?
It would seem that any items under the “Repairs and maintenance” line item would incur some depreciation.
11/28/2009 at 3:20 AM |
Ah, good point. A Loss Due to Vacancy is not a tax item. There is no Tax Deduction or Tax Benefit for vacancy. You will sitll incur your monthly expenses, but you cannot write-off the unpaid, missing rent.
But, for Financial Statement accounting (the data management cares about), you *would* include a Loss due to Vacancy. This is a key management line item…but the tax man doesn’t care.
Accounting is always concerned with tracking data for “Financial Statement or Book” purposes as well as “Tax” purposes. Sometimes the rules contrast each other.
11/26/2009 at 9:52 PM |
There are a couple of unknowns to this scenario that are critical to even begin. The first is not knowing the actual debt service and the loan specifics. I understand that each member of the LLC contributed $15,000 at the time of purchase but that couldn’t have been all of the down payment made on this property.
I’m sorry…I might be looking at this too critically.
11/28/2009 at 3:22 AM |
Yes – true! We MUSt know every detail possibe about the debt.
Debt service will tell us much more info: interest expense deduction, cash requirements, liability allocation (we’ll learn more about this in the tax section).
11/29/2009 at 7:32 PM |
Expenses that may have been missed:
1. Costs associated with lawyers to close the deal (Legal Costs)
2. Accounting Costs (possibly to set up ABC LLC and the fees associated with that)
The Annual Depreciation for the first year would be, $58,181.82?
– Based off of the purchase price and having a depreciation life of 27.5 years.
12/04/2009 at 5:19 AM |
Also one time closing costs and fees: transfer tax, loan fees (points).
If these should be included which of the 5 categories they would fall in?
12/13/2009 at 12:59 AM |
closing costs fall into the Asset category – they become part of the building asset.
Loan fees area a seperate asset, Loan Fee Asset, and are slowly written off over the life of the loan typically.
12/07/2009 at 8:27 AM |
For all the closing costs can’t you look at the expenses we are listing here as two categories: deductions which I think the interest and real estate taxes would count as. And then depreciation which would be all of the other expenses (legal, title, utilities, etc.) added on to the basis of $1.6 mil.
Also, how do rentals work in terms of passive activity losses (PAL’s) for investors not materially participating? Can these types of losses still be used to offset active income that they may be earning?
12/13/2009 at 12:58 AM |
Yes, you can seperate those categories.
Rentals allows PALs for investors with an “active” level of participation and 10% ownership, at least. Active participation is a minimal amount of involvment when compared to the Material participation rules. So, if you can meet the rules of active investor, then you can deduct up to $25,000 of rental losses generated annual. But once your income from all sources exceeds $100k, this allowable loss amount is reduced; it is fully phased out at $150k. Check out the following link for more info. http://www.irs.gov/businesses/small/article/0,,id=146326,00.html
We will discuss this subject in more depth in the coming months.
12/07/2009 at 5:39 PM |
The expenses that are missing:
1) Administering Expense ( I’m not sure about it but in Thailand we have to paid for administering expense).
2)Accounting expense
3) Attorney
04/24/2013 at 6:21 PM |
What would the balance sheet look like? The only asset of this residentail building is valued at 1.6 million less the depreciation, but this would not even match the Equity of $45,000 investment put in by the three owners.
02/05/2017 at 5:09 PM |
Based upon the information we have been given, I calculate the monthly P&L to be $6,781 (we are missing interest expense, repairs, among other items).
Revs: $15k
Exp: $3370
Dep Exp: $4849 (based upon $1.6m and 27.5 years)
CF/month: $11630 (missing other expenses as well as monthly mtg payment)
Net Inc $6781
+
Dep Exp $4849