Was just looking over some financials for a rental property we purchased back in May of this year and realized something didn't look right while I was doing a reconciliation. I know I've seen some great answers to other accounting/investment questions in the past here, so I though I'd see what you guys had to say about this situation.
On 5-16-14 we purchased a rental property. At the time of purchase, property taxes were already paid and current by seller, so we aren't responsible for another property tax payment until this upcoming September.
Now, at the time of purchase I didn't think much of it, but looking over the balance sheet from the closing statement, no where on that page did we reimburse the seller for pre-paid property taxes after we took possession- in fact, not only are our property taxes paid up until September by the seller, but we also received a pro-rated balance from the seller for taxes from 7-1-13 to 5-16-14 (a period of time prior to our ownership) - which lowered our closing costs by $1000.
So here's my question:
How do I classify these numbers on my general ledger?
The error I noticed is that back when I initially inserted the numbers into my software, I entered the $1000 as both a credit (since it was essentially cash we received off our closing costs) as well as classified it as a property tax (since it was pro-rated property tax). The result is that since I've yet to actually cut a check to pay any property taxes and because there weren't any reimbursements to the seller for pro-rated property taxes now that I own the property, it currently appears as though my current tax expenses are negative $1000.
So, now I'm trying to reconsider how I need to really insert this into my system so I can accurately reconcile the account.
My initial thought now is to still consider that as a credit (since I did in fact receive those funds off my closing costs from the seller), but to instead classify that as Misc. Income - but then, is that really considered income or is it really classified prepaid taxes?
Secondly, the seller has nearly prepaid 4 1/2 months worth of property taxes for me (since they're paid up until September and I never reimbursed them on them closing statement) in addition to the $1050 I've already mentioned that they paid me for July 2013 to May 16th, 2014 when we took possession. Since the seller has paid those 4 1/2 months worth of taxes for me, do I need to report that as income? And if so, can I turn around and also take that same amount and offset it as a property tax payment.
Hopefully this makes sense and thanks for any help you can give. I have a tax professional I use on occasion, but I prefer learning and understanding these things myself and I can't seem to find the answer elsewhere.
On 5-16-14 we purchased a rental property. At the time of purchase, property taxes were already paid and current by seller, so we aren't responsible for another property tax payment until this upcoming September.
Now, at the time of purchase I didn't think much of it, but looking over the balance sheet from the closing statement, no where on that page did we reimburse the seller for pre-paid property taxes after we took possession- in fact, not only are our property taxes paid up until September by the seller, but we also received a pro-rated balance from the seller for taxes from 7-1-13 to 5-16-14 (a period of time prior to our ownership) - which lowered our closing costs by $1000.
So here's my question:
How do I classify these numbers on my general ledger?
The error I noticed is that back when I initially inserted the numbers into my software, I entered the $1000 as both a credit (since it was essentially cash we received off our closing costs) as well as classified it as a property tax (since it was pro-rated property tax). The result is that since I've yet to actually cut a check to pay any property taxes and because there weren't any reimbursements to the seller for pro-rated property taxes now that I own the property, it currently appears as though my current tax expenses are negative $1000.
So, now I'm trying to reconsider how I need to really insert this into my system so I can accurately reconcile the account.
My initial thought now is to still consider that as a credit (since I did in fact receive those funds off my closing costs from the seller), but to instead classify that as Misc. Income - but then, is that really considered income or is it really classified prepaid taxes?
Secondly, the seller has nearly prepaid 4 1/2 months worth of property taxes for me (since they're paid up until September and I never reimbursed them on them closing statement) in addition to the $1050 I've already mentioned that they paid me for July 2013 to May 16th, 2014 when we took possession. Since the seller has paid those 4 1/2 months worth of taxes for me, do I need to report that as income? And if so, can I turn around and also take that same amount and offset it as a property tax payment.
Hopefully this makes sense and thanks for any help you can give. I have a tax professional I use on occasion, but I prefer learning and understanding these things myself and I can't seem to find the answer elsewhere.
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