USA New LLC for Rental Property - help with setting up books

[westland]

Good Morning,

My husband and I have created an LLC for a property that we purchased and are using as a rental. I've not had an accounting class in 20 years and want to run a few things by you experts to see if I am on the right track:

1) The rental house - My husband and I purchased the home (in foreclosure) and spent about 4 months in 2011 bringing it up to rental quality. In January of 2012, we established our LLC and transferred ownership of the rental home to the LLC. I know I must show the home (as building and land) as an asset for the LLC and must depreciate the building (improvement) piece over 27.5 years. My question is what value do I list for the building and land? I paid $130,000 for the home which included the building and land together (price of each was not separated). When we transferred the house to the LLC, we showed it with the value of $130,000- the amount we paid. If I look to my tax assessment on the property, it shows a land value of $66,000 (33% of the total assessed value), and an improvement value of $134,000 (67% of the total assessed value of $200,000). As you can see, the assessment is much higher than what I actually paid for the property that was in foreclosure. When breaking this asset down into land and building do I do it as a percent of the assessment (Ex: Land $42,900 (33% of $130,000) and Building $87,100 (67% of $130,000) or do I state the land at $66,000 (as per the overstated assessment) and then list the value of the building as $64,000)?

2) Replacement of Hot Water Heater In my chart of accounts, I do not have separate accounts for each appliance as they were included in the purchase of the home. I did, however, recently have to purchase a new hot water heater for the home. I know I have to show the new hot water heater as an asset owned by the LLC and that I have to depreciate it for 5 years. My question comes in the number and names of the accounts I need to set up to accomplish this. I know I need an asset account for the hot water heater - what is that typically called? Do I create an account called "household equipment" and put it there? Should there be a separate account for if and when I need to replace an appliance like "household appliances?" If so, do these two accounts stand alone or should they feed into a parent level account called something like "Building equipment?"

Also, when I depreciate the hot water heater each month. I believe I do it like this:

Debit (Asset: Name [Hot Water Heater, or Household Equipment: Hot water heater?] Accumulated Depreciation)

Credit (Expense: Name [What is the name of this account? Is there a separate depreciation expense account for each asset or do you just credit the depreciation expense account for the appropriate amount and note in the journal entry which asset the expense if for?] Depreciation)

3 Lawn Care Expense As a part of our lease agreement, we've included the cost of cutting the lawn on a weekly basis. We had an old gas powered push mower (15 years old) that we intended to use exclusively for the rental home. It needed some repairs, so my husband purchased the necessary part(s) and fixed it himself. The questions here are:

Do i need to show the lawn mower as an asset? I believe it is probably beyond its useful life being 15 years old so I don't think it would really have a book value. Or, since it has been repaired do I take the cost of that part (say $50) and list that as the value of the asset and depreciate it over time? If so, how many years do you depreciate a lawn mower?

I really need some help defining the chart of accounts. I know what qualifies as assets, liabilities etc., I just need some help determining the matrix: For example does this look right:

Asset: Building Equipment (Parent account)
Appliances (sub account)
Heating/Plumbing Equipment (sub account)
Lawn Care Equipment (sub account)

also, are there parent and sub account in expenses, i.e.:

Expenses: Maintenance and Repair
Appliance Repair (sub account)
Heating/plumbing Repair (sub account)
Lawn Care Maintenance (sub account)
Cleaning Expense (sub account)
Miscellaneous Repair (sub account)

also, what about depreciation? Does it look like this or is each its own "parent account?"

Expense: Depreciation (parent)
Building Depreciation Expense (sub account)
Household Equipment Depreciation Expense (sub account)

Is household equipment depreciation expense account the right place to make journal entries for deprecation related to the hot water heater, and/or any new appliances I might purchase or do I have to show each expense as a separate deprecation expense account?

Sorry for the lengthy question but i think I might just be over thinking matters and could really benefit from someone setting me straight. Thanks in advance.

 

[ArcSine]

1] In the US, your tax depreciation will be based on the lower of the asset's cost, or its fair value when you transferred it into the LLC and began treating it as rental property. Ignoring tax law for a moment, a set of books based solely on general accounting principles would probably put the asset onto the LLC's books at its fair value.

However, in most cases such as yours, the strictly-accounting-principles approach has little value, so there's no need to keep two sets of books. Just put it on the balance sheet at cost (assuming it was indeed worth at least that much when you transferred it into the LLC), since that'll give you the depreciation numbers you'll need on the tax return.

You could allocate the original 130K between land and building based on the tax assessment's 1/3 - 2/3 split, or you might have facts that indicate a different allocation (such as the going price for undeveloped lots in the area). In any event, use whatever split is reasonable and defensible. Also, of course, allocate your subsequent improvement costs based on how they were applied.

2] Part (a): The naming of your accounts and the structure and layout of your chart of accounts, should be in whatever manner is most meaningful, informative, and efficient for your purposes. One of those purposes, of course, is the efficient preparation of the tax return after year end, and your COA's organization should be conducive to that end. Beyond that, though, just let your needs be your guide.

Part (b): You've got it backwards; the debit hits the income statement via some expense account named "depreciation expense" or something similar. The credit side of the entry lands on the balance sheet in "accumulated depreciation".

3] If the lawnmower had any significant fair value when you began using it exclusively for the rental activity, you could put it on the balance sheet at such value (note that this is the depreciable value for US tax purposes, in this case). However, if the mower's value is minimal, laying it onto the balance sheet and depreciating it might be more trouble than it's worth; it just depends on the amounts involved. Your call.

Again with the structure and layout of your books, let your particular circumstances and needs drive your accounts layout decisions. There are no hard and fast rules; it's just whatever structure gives you the best organization and summarization of the numbers to suit your needs.

Congrats on the new biz, and best of luck with it!

 

[westland]

Thanks arcsine. Sorry about the debit/credit mix up with depreciation - it was a typo - I think I was in such a hurry to get my questions out that I didn't pay attention to what I actually typed. You are absolutely right - the debit goes to the expense and the credit to the contra asset "deprecation." Again, thanks for your help.

 

[dale123]

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