How to categorize acquisition / closing cost transactions

Tips & Tricks
1

I purchased a new property and the payment to title shows up on the bank account that I have linked to Stessa. Unfortunately there is no purchase or acquisition category that I could choose for the transaction. All that I could find was Down Payments. How would you recommend categorizing this transaction?

2

@investing929 Good question. Stessa does indeed have appropriate categories for closing costs, but you’ll need to first figure out whether you are expensing it in the year incurred or capitalizing it as part of your cost basis. This is a tax/CPA question, for which we do not provide official advice.

Some of the Stessa categories that might be appropriate for various acquisition costs include:

  • Capital Expenses > New Acquisitions
  • Capital Expenses > Closing Costs
  • Capital Expenses > Loan Costs
  • Mortgages & Loans > Proceeds & Payoffs
  • Transfers > Sale Proceeds
  • Insurance
  • Taxes
  • Utilities
3

Thanks for the answer @devin. I assumed that “Closing Costs” was the fees associated with the closing, not the acquisition cost. But alright, I guess I’ll be using this category then.

4

@investing929 Sorry, just to be clear, the entry for funds used to purchase the property should be categorized under “Capital Expenses > New Acquisition” so that it appears in the proper place on your Net Cash Flow report. Acquisition prices and original loan balances should also be entered separately via the Properties page.

5

@devin I see. Would be great to have categories for initial purchase and initial rehab that don’t count towards the cashflow. The transaction is there since it was made from a linked account. Feels kind of counter productive to either delete it or to mark it as transfer just so it doesn’t mess up the cashflow numbers.

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6

For the transactions that come in under a linked account, I Move them to a portfolio called “For Audit” That way they are not part of the ‘real portfolio’, not deleted (from an audit point of view is ‘sub-optimal’), and have a real place to go (which is optimal from an audit point of view). Obviously you can name your audit bucket anything you wish.

I have done the same thing for my ‘personal bank account’ Assign all transactions to “Personal Account Audit” then reassign the few items that should be associated with one of the other companies or properties.

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7

@devin Would you recommend using transfers for things like Home Inspections pre-closing, and appraisal costs or what do you recommend there? If so, which specifically of the sub-categories do you think fits those the best?

8

@christopher.mikle There’s a Capital Expenses > Closing Costs category specifically for closing costs that will be capitalized. For items that will be expensed in the year incurred, you can simply use the most appropriate regular category. If you’re not sure which expenses must be capitalized, check in with a good CPA.

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9

Hi, I am in the same situation. I just purchased a property and when I record the purchase price and closing costs as Capital Expenses>Closing Costs, the value of the property nor the closing costs show up on the balance sheet as an asset. What am I doing wrong? Thanks

10

@liliana Good questions. The purchase price can be categorized under Capital Expenses > New Acquisition. It should also be separately entered under “Acquisition Price” by clicking in the appropriate place in the grid on your Properties page. “Closing Costs” is only for other fees or costs paid during the closing, not the actual purchase price.

Further, the Balance Sheet will show the current valuation only, not the original cost basis. To learn more about updating your valuation, read Valuation Method: Select & Manage.

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11

Thanks so much, this was super helpful.

12

Happy new year folks and great discussion. I’ve been having the same dilemma for acquisitions. I think clear on how to categorize expenses that I pay prior to closing. For example:

Earnest money - Transfers > Down Payments
Loan application fee (paid at application using credit card) - Capital Expenses >
Home inspections - Legal and Professional > Inspections

The above costs (when looking at a closing statement) fall typically fall under the “borrower paid - before closing” category.

However, at closing there’ll be a number of other costs such as appraisal fee, credit report fee, title insurance etc etc (under “borrower paid - at closing” category). The closing statement will then go onto itemize other costs and also credits and finally “cash to close” number will be the check that I write.

The question I have is, do I account for this “cash to close” number at all in Stessa? If yes, do I just put the total and pick Transfers > Down Payments category (since ~90% will be down payment, BUT it will also include other loan costs not paid prior to closing). I am assuming there is no benefit in itemizing closing statement numbers in Stessa?

Related to this I am in the process of acquiring another property using the BRRRR approach. So purchase will be cash, there will be a rehab cost and then plan to do a refi. Do all of these go in the “transfers” category?

Hope I was able to explain my question without complicating things :smiley:

Thanks!

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13

Is there any chance that you can provide an example (in Stessa) for the appropriate way to do this? I am still a little unclear and would like to tighten it up prior to tax time.

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14

If you write one big check for all of your closing costs and that singular transaction is what gets pulled into Stessa from your bank, you can use the “split” function to itemize all the various closing fees and payments.

15

Good news! We’ve recently added additional support for big ticket items like acquisitions, refinances, and asset sales. The categories you’ll likely want to focus on include:

  • Capital Expenses > New Acquisitions
  • Capital Expenses > Closing Costs
  • Capital Expenses > Loan Costs
  • Mortgages & Loans > Proceeds & Payoffs
  • Transfers > Sale Proceeds
  • Insurance
  • Taxes
  • Utilities

For more information about Stessa best practices around this topic, please visit: Track Purchases, Sales, and Refinances

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16

Hi,
I have a similar problem. I am adding a property I bought a few years ago. It was a BRRR, so I bought it in cash, rehabbed it with cash, and refinanced it a few months later. I have added these transactions:

purchase price (capital expenses->new acquisitions)
closing costs (capital expenses->closing costs)
Loan proceeds (mortgages & loans->proceeds & payoffs)

I have added all of these transactions, but Stessa still calculates my cash on cash return based on my total acquisition cost, not counting the loan proceeds. I have even tried changing the date of the loan proceeds to the same date and the purchase but it didn’t help. Thanks.

17

@david.matarazzo2 So, the Cash-on-Cash return metric relies upon the Financial Details modal and the Mortgage/Loan card. You’re likely missing the “Original Loan Balance” input on your mortgage card (for the refinance proceeds), which can be accessed via the Properties page. Just click the mortgage balance to access the input screen.

This article might also help: Understanding Your Cash-on-Cash Return

18

Hello,
New to this and the terminology is a bit fuzzy. Can you confirm if this is correct?

Property Price: $240,000
Closing statement total: $248,576.34

Is the $8,576.34 difference considered the closing costs?

It looks like $8,576.34 includes:
– Proration/adjustments
– Loan charges to lender
– Impounds
– Title Charges & Escrow / Settlement Charges
– Commissions
– Government Recording
– Broker fees
I’m guessing that I have to figure out which of these items are expenses vs capital expenses?

My cash to close was for $50,131 at closing. I’m not sure how to record this, if at all.
Do I record $8,576.34 as closing costs or $50,131 as closing costs?

My down payment was 20% ($48,000). How is this recorded?

Thanks in advance.

19

“Down payments” and “cash to close” are not real “expenses.” They’re simply movements of money. Therefore, you can track them in Stessa under “Transfers” if you like, but your CPA probably doesn’t care one way or another.

You’re absolutely right that you, “have to figure out which of these items are expenses vs capital expenses,” with the added caveat that you also need to carve out loan expenses. Loan expenses are typically amortized over the expected life of the loan, which is usually a different timetable than the useful life of the improvements.

The bottom line is that Stessa is built to be flexible enough to handle different purchase, sale, income, and expense situations, but we do not provide specific tax advice. We strongly advise you to check with your CPA for more information about how to handle this scenario.

20

Based on the Track Purchases, Sales, and Refinances we should record the total cost and the proceeds from the loan coming in on the same day (the difference being the down payment). How do you handle earnest money with this way of recording? I paid the earnest money like a month before closing, but I cannot change the purchase price to discount the earnest money.