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J
jenakason
February 19, 2021
Question

Mortgage for rental property

  • February 19, 2021
  • 2 replies
  • 95 views

I am wanting to correctly set up a mortgage in my chart of accounts for our rental property company. I have made a long term liability account for the mortgage principal and an expense account for the mortgage interest. I was also advised to set up the mortgage as a fixed asset. I also set up an escrow account as a 'other current asset'. So, I made a general journal entry that is debiting $91,500 (the original loan amount) from the fixed asset (titled Bank of America Mortgage) and credited the principal the $91,500 amount. I entered the whole first year of payments that were made and divided up the payment accordingly (principal, interest, and escrow). Looking at my chart of accounts now, the fixed asset account is the same amount as I originally entered ($91,500). The long term liability account has decreased as I expected it to (with the total principal subtracted from the original $91,500). My question is, what is the point of the asset account? Also, when I create a balance sheet report for the year, it's not balancing. 

2 replies

A
AlinS
February 21, 2021

I’m no expert so take what i’m saying here with a big grain of salt.

 

first thing first: you don’t setup the mortgage as a fixed asset, you setup the property as a fixed asset. there’s a big difference. 

 

i’m assuming your question is actually “what is the point of the fixed asset account?” and the answer is: so you can track CapEx and depreciation. when you setup the property as a fixed assert you may want to split that into building and land as sub accounts. you can depreciate the building but you can’t depreciate the land, so if you want to track the depreciation you need the split.

 

so your fixed asset balance is not changed by the mortgage payments (what you said that the amount is the same at the end of the year) since paying the mortage down does not changes in any way the value of the asset. is just changing your long term liabilities

 

hope this makes sense

    J
    jenakasonAuthor
    February 22, 2021

    Thank you for the response. That makes complete sense. We have a CPA file our taxes for us, so the main point of my Quickbooks entries is so I can get them the necessary rent, expense, etc. info needed come tax time. They do the depreciation on their end, so not sure I really need to do anything with the property as a fixed asset on my books. Since we typically buy properties that are worth more than we pay for and/or remodel properties that increase the value of the property, does this affect this number (right now I have been putting the fixed asset in as the amount of the original mortgage). Is it safe to assume that I don't need to do anything as far as a fixed asset account for our properties? I guess I'm a little confused because the purchase price of the property really should be the original fixed asset (not the original mortgage) but then that can change over time (typically the property/land would increase)? One last question...how would you suggest recording a down payment for a property? Typically we'll put 20-30 percent down and finance the rest. Just curious what the best method would be.

    J
    jenakasonAuthor
    February 25, 2021

    Any ideas on this? I'd appreciate some input; thanks!

    J
    jackiesami
    September 22, 2025

    I think the source of much of the confusion might be in your thinking that a mortgage is a fixed asset, when it’s not — at least not for you. The mortgage is a debt, not an asset.

     

    Here’s how it generally works:

     

    • Fixed asset account = the purchase price of the property (plus any capital improvements). This allows you to track the real value of your home for accounting purposes, such as depreciation and upgrades. And even if your property appreciates in market value, your books tend to carry it at historical cost and add capital improvements separately.
    • Long-term liability account = balance of the mortgage. This declines as the loan is repaid.
    • Interest expense account = the piece of your payments that are going to interest.
    • Escrow / other current assets = the hold back/escrow that are held for real estate taxes, insurance, etc.

     

    Because they screwed up the writing down of your asset (mortgage). Once you assign the actual property as the fixed asset, the books should balance: your assets equal liabilities plus equity.

     

    It is also key that progress be measured accurately. Under the property condition for mortgage lending, only some improvements or updates are capitalized. Normal maintenance doesn’t add to the asset value on your books — it is expensed when it occurs. So keeping these separate will keep your books clean and accurate.

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