Start with the final closing statement
The settlement statement shows purchase price, deposits, loan proceeds, prorations, fees, escrow funding, and cash due. Treat it as a reconciliation document rather than posting only the bank withdrawal.
Collect the purchase contract, appraisal or allocation support, loan documents, title records, and invoices for costs paid outside closing.
Allocate land and building
Land is not depreciable, so allocate the acquisition basis between land and building using a reasonable, documented method. Certain settlement and acquisition costs increase basis, while prepaid expenses, escrow deposits, loan costs, and current expenses may receive different treatment.
Furniture, appliances, or other identifiable assets included in the purchase may require separate classification and recovery periods.
Establish liabilities and opening balances
Record the mortgage at the amount borrowed, not the total future payments. Record escrow as an asset and track seller or buyer prorations according to what they represent.
The opening entry must balance. If it does not, revisit omitted deposits, credits, costs, and funds paid outside closing rather than using a miscellaneous plug.
Accounting examples
Example: simplified purchase entry
Assume $60,000 land, $240,000 building, $3,000 escrow, a $240,000 mortgage, and $63,000 owner cash.
| Account or treatment | Debit | Credit |
|---|---|---|
| Land | $60,000 | |
| Building | $240,000 | |
| Mortgage Escrow Asset | $3,000 | |
| Mortgage Payable | $240,000 | |
| Owner Contributions / Cash | $63,000 |
Real closing entries usually include additional costs and prorations that require fact-specific treatment.
Sources and limitations
This guide provides general educational information for US rental owners. Accounting and tax treatment depends on your facts, accounting method, entity, current law, and professional judgment. State and local rules may impose additional requirements. This is not tax, legal, accounting, financial, or investment advice.
- Publication 551, Basis of AssetsInternal Revenue Service
- Publication 527, Residential Rental PropertyInternal Revenue Service
- Publication 946, How To Depreciate PropertyInternal Revenue Service
RentalBooks
How RentalBooks can help
RentalBooks can carry an evaluated property into the workspace, then track its land, building, financing, escrow, and later asset activity.
- Create property and unit records from an investment analysis.
- Post a balanced opening journal entry with property scope.
- Track buildings, improvements, loans, escrow, and depreciation in separate accounts.