Why Real Estate Companies Should Consider Income Tax Basis Accounting for Financial Statements

gaap accounting real estate

When evidence of an increase in NRV exists as a result of changes in economic circumstances, the extent of previous write-downs may be reversed and is recognized as a reduction of the amount of inventory expensed in the period. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network.

  • Owner-occupied property is property held (by the owner or by the lessee as a right-of use asset) for use in the production or supply of goods or services or for administrative purposes.
  • Our online software allows small business owners to take control of their accounting challenges easily, thanks to receipt tracking, automated reconciliation, and easy-to-read metrics.
  • Insurance recoveries that are related to cleanup and are recognized in subsequent periods should be reported as other financing sources or extraordinary items, as appropriate.
  • If we assume that discounted cash flows are $20,000,000, impairment charges amounting to $30,000,000 ($50,000,000–$20,000,000) must be recognized for GAAP in the compa­ny’s 2010 results of operations and the real estate on the balance sheet must be reduced to $20,000,000.
  • For all financial assets and liabilities as well as all nonfinancial assets/liabilities that are recognized at fair value on a recurring basis, such as real estate investment fund assets measured at fair value, the statement became effective for fiscal years beginning after Nov. 15, 2007.

If the improvement is made to a building and is considered to have an independent useful life, depreciation is recognized over the service life of the improvement. The revised depreciation charges should begin in the first month following final payment or when the asset is placed in service, whichever occurs first. The cost incurred for any asset that does not meet the criteria described above or the capitalization threshold for similar assets should be expensed in the period incurred.


However, if floor renovations are rare, or no particular trend emerges in the frequency of the renovation, a Reserve Bank may consider assigning the remaining useful life of the building as the useful life of its current renovation. Improvements that replace assets with a separately distinguishable book value should be treated as a replacement . See paragraphs 30.85–30.87 for the appropriate treatment of leasehold and tenant improvements. The pooled asset method of capitalizing, depreciating, and handling improvements is discussed in paragraphs 30.55–30.58.

In addition to highest and best use, Statement no. 157 introduces other concepts that may impact a real estate analysis, in particular the way it addresses selling costs and market-based assumptions. With regard to selling costs, the fair value measurement assumes the sale of the asset occurs in the principal market, or absent this, the most advantageous market for the asset. The principal market is the market for the asset with the greatest volume and level of activity. The most advantageous market is the market in which the reporting entity would sell the asset for the price that maximizes the amount received for the asset, considering transaction costs in the respective market. Under Statement no. 157, the fair value measurements for real property assets assume the highest and best use, as viewed by market participants, even if the intended use by the reporting entity is different.

Non-GAAP Financial Measures

Using the income tax basis of accounting, no portion of the purchase price is allocated to in-place or above/below market leases. Accordingly, the real estate buyer would report real estate assets totaling $50,000,000 on its balance sheet, and there would be no reduction in rent income since there is no amortization of intangibles. There­fore, 2010 tax basis rent income would be $400,000 higher than GAAP rent income but there would be additional depreciation ex­pense on the building due to its higher carry­ing value for tax reporting purposes. Costs of forming a business, such as legal fees for drafting of documents, state filing fees, and accounting costs incident to organization, are treated very differently for GAAP and income tax reporting purposes. Post October 22, 2004, for tax basis reporting, a business can elect to deduct up to $5,000 in organization costs in the tax year in which the business began (subject to a dollar for dollar phase-out when organization costs exceed $50,000) and the balance must be amortized over a 180 month period. If a real estate company began business on January 1, 2010 and incurred $100,000 in organization costs, for GAAP purposes, $100,000 of organizational expenditures would be deducted on the income statement in 2010.

  • However, if the carrying amount of the right-of-use asset is reduced to zero, any remaining amount of the remeasurement is recognized in the Statement of Operations.
  • Under the income tax basis, real estate assets are depreciated over periods specified in the Internal Revenue Code, while GAAP uses estimated useful lives.
  • • A mortgage is designated under GAAP as a “capital expense.” There is ownership in the building.
  • It’s wise to create a separate business account so you can keep track of every transaction.

The Prescribed option includes only the accounts which are the valid BARS account codes for annual report filing. The PDF is formatted to highlight the different categories of account codes and for printing. For display purposes, the account codes contain decimal points which should be excluded in your annual report.


Another reason to choose the income tax basis of reporting is that your records would be on the same basis for your financial statements and your tax returns. This means you won’t have to spend time maintaining two different sets of books and records. If income tax basis accounting is the right fit for your company, it could save you time and money when it comes to year-end reporting. Let’s take a closer look at the upside of the income tax basis accounting method. There are other differences between the GAAP and income tax basis of financial reporting. Contact Larry Davidson, CPA at , for assistance in determining which is the appropriate financial reporting model for your real estate operations.

  • This account should be charged for the full acquisition cost as described in paragraph 30.01 and care should be taken to ensure asset and liability accounts are properly reflected at the time the asset is received.
  • For example, suppose a tenant has a two-month rent holiday at the beginning of its lease term on January 1 and pays $25,000 per month in base rent for the remainder of its 10-year lease.
  • Finally, we examined some of the best practices to put in place for successful real estate accounting.
  • The carrying value of other real estate held for sale should be evaluated by the end of the calendar year, at a minimum, to determine if adjustments are necessary (see paragraph 30.95).
  • A company would need to estimate future cash flows using assumptions regarding factors such as market rents, economic conditions and occupancy rates.

Note that by selecting this submission option, preparers of the annual reports are certifying that their government meets the definition of no activity as explained above. As mentioned, before Statement no. 157 many real property valuations were based on a specific owner’s intended use. In other words, assets were valued based on what the asset was worth to that specific user, rather than what that asset was worth to a typical market participant. A highest and best use analysis was retail accounting normally an afterthought in these situations, and was the reason the highest and best use concept had not been consistently applied in valuing real property for financial reporting purposes. Major expenditures made in connection with the renovation or alteration of a space rented for Bank use should be capitalized in Deferred Charges (see paragraph 4.20). The cost of minor repairs and maintenance involved in the upkeep of leased quarters should be charged to current expense.

Annual/biennial appropriated budget – A fixed budget adopted for the government’s fiscal period. The appropriated budget was traditionally used to determine a government’s property tax levy, and a ceiling on expenditures was made absolute so that the expenditures of a government unit would not exceed its revenues. This budget was also historically a balanced budget, estimated revenues equaling appropriations. The appropriated budget is still used to set tax levies and some budget statutes still require balanced budgets, but it is more generally used to authorize a specific amount of expenditures regardless of whether estimated resources meet or exceed that amount.

gaap accounting real estate

A signifi­cant amount of time can be spent developing and fine tuning models used to test for impairment and often independent appraisals will be needed to satisfy third parties. Ap­praisals might even be needed in establishing whether the undiscounted future net cash flows exceed the carrying amount with re­spect to the assumptions used to calculate terminal value. For real estate owners, accountants, and auditors alike, keeping track of all the nuances to the reporting requirements of the various financial reporting frameworks can be challenging.

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