Rental real estate can be a great money-making opportunity, especially if you go into it with the intention of running it as a business. That includes taking appropriate stock of assets and liabilities so you can get an accurate measure of the amount of investment you have at stake. Track whether the value of that investment is growing, independent of the income your rental property generates.
The accounting definition of an asset is "Something valuable that an entity owns, benefits from, or has use of, in generating income. Take a look at your property and you'll see what they're talking about:
Land: You can choose to use the purchase price of the land or the most recent appraised value.
Building: Choose the equivalent value that you used for the land. If you used the purchase price, then be sure to use the original cost of the building (apples and apples). If you cannot separate out the value of the land and buildings, don't worry, since you'll be adding these up at the end anyway. You can often find a split on your real estate tax bill.
Improvements. Have you made any significant upgrades to the property since you purchased it? Examples include a new roof, a building addition, new flooring, new heating or cooling systems, even landscaping. Anything that you need to depreciate on your rental tax return can be considered an asset. Use the amount you paid for the improvements.
Furnishings. This includes furniture, appliances, draperies and any other item that did not come as part of the original home. If the washer and dryer were included when you purchased it, they'll be counted under the building's value.
Escrow account. Don't forget the money sitting in escrow right now. Eventually it will go to pay property taxes or insurance.
These are the flip side of assets. It's what you still owe on the price of the assets. For most property that means outstanding mortgage balances. Both the first and any additional mortgages or equity lines of credit must be counted. Those are long-term liabilities.
You also have short term liabilities which are any real-estate-related payments due during the next year or so. Not so obvious are unpaid real estate taxes. You owe them, whether or not you've gotten the bill. Do you have PMI (private mortgage insurance)? The amount you must pay for this year counts as a liability. Add in any additional property insurance, licensing fees or dues for homeowners' associations or other payments you are required to make on the home during the remainder of the calendar year. If you used credit cards for real-estate related purchases, such as furnishings, include those amounts to get the most accurate picture of your financial situation.
The Balance Sheet
Accountants call a listing of assets and liabilities a balance sheet. If you've taken any accounting classes you may remember this key formula:
Assets – Liabilities = Owner's equity
Add up the assets and subtract the liabilities to find out whether you've got any equity in the property as a whole.
- Comstock Images/Comstock/Getty Images
- Can I Get Penalized for Not Claiming a Second House on Taxes?
- Do I Need a Primary Residence to Use a Vacation Home as a Tax Write-Off?
- Allowable Deductions for Rental Property
- How Is Mortgage Interest Deduction Calculated?
- Tax Deductions for Gas & Electricity for a Rental Property
- The Deduction of Mortgage Interest
- Is Homeowners Insurance Tax Deductible?
- Depreciation of Inherited Property