How to categorize earnest money for rental property purchase
somecallmemike
Member Posts: 1
Hello, I am starting a real estate investment business and trying to get a head start on accounting by using Wave. Not being an accountant I am fairly green in my understanding of how to organize a chart of accounts, and especially how to post transactions properly. In that spirit I was hoping someone could help explain how to categorize a transaction from my bank account showing a $3000 withdrawal which was sent as a check to a title service company for an earnest money deposit. Much thanks!
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Not a professional accountant!
Assuming this transaction was made from your business checking account, you create an Asset account and categorize this earnest money, any other money used to close, and the money from a loan into the Asset. This asset will be what you setup your depreciation schedule on. If you have a bank loan, you'll need to setup a liability account for that loan as well. Showing the money you borrowed moving from that liability account to the asset. Then record your loan payments by breaking out principle (paid to the liability, not tax deductible), interest (paid to Interest Expense, tax deductible). If you have an escrow account that pays your taxes and insurance, you'll have to do some research on how to track that properly. The jist is that you setup an Asset account to record those payments and then move the funds to the right expense account once your bank pays taxes and insurance with it.