How do I handle a property purchase in my books?
Recording a property purchase correctly starts with breaking down the total acquisition cost into its components. You cannot just book the full purchase price as a single asset. The amount needs to be allocated between land and building, and often personal property as well, because each category follows different depreciation rules.
The purchase price allocation divides what you paid between land (which you cannot depreciate), the building or improvements (depreciated over 27.5 years for residential or 39 years for commercial), and any personal property like appliances, furniture, or fixtures (typically depreciated over 5 to 7 years). The way you make this split affects your annual depreciation deductions for as long as you hold the property. It also affects the gain calculation when you eventually sell.
Most investors use one of a few methods for the allocation. You can base it on the county tax assessor’s split between land and improvements. You can get an independent appraisal. Or if you’re doing a cost segregation study, the engineers will provide a detailed breakdown that identifies personal property and land improvements you might otherwise miss. Whatever method you choose should be defensible and documented.
Closing costs need to go in the right place too. Some get added to your basis in the property, which increases what you can depreciate and reduces your eventual gain. These include title insurance, attorney fees for the purchase, recording fees, transfer taxes, and survey costs. Other closing costs are handled differently. Loan origination points may be amortized over the loan term. Prorated property taxes paid at closing are typically deducted as taxes in that year. Getting these categorized correctly at acquisition saves cleanup work later.
Once you have the allocation, set up your depreciation schedule starting from the date the property was placed in service. The building portion goes on the appropriate life. Personal property goes on shorter lives. Land sits in your books with no depreciation. Your real estate bookkeeping system should track these schedules so the depreciation expense flows correctly each month and the accumulated depreciation balance stays current.
Getting the acquisition recorded correctly matters beyond just the first year. Every year’s depreciation depends on it. The gain or loss when you sell depends on it. If you’re working with a fractional CFO for real estate or a tax advisor on strategies like cost segregation or planning for a future sale, the work builds on this foundation. And if you have investors or lenders, they expect to see assets recorded properly with depreciation schedules that tie back to the tax returns.
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