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Guest LonnieWA

Bookkeping & Taxes

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Guest LonnieWA

I will be creating A coporation to do my flips & sandwich L/O to start but I have a few questions about how to enter these tranactions into the books.

 

1. Option money- After Donald Tenant gives me his option money of $3000.00 I go to my bookeeping software and create a liabilty account named option payable and I will credit this account $3000.00

 

Then I will debit my asset acount/bank $3000.00 also.

 

When tenant exercise their option I would debit the liability account $3000.00 and credit the revenue account $3000.00.

 

Do this sound like the correct way to do this and if not what some of you guys would do? Any suggestions would be appreciated.

 

Also, what form would I use to report this income on if I am using a corporation?

 

All answers are appeciated.

 

Thanks,

 

Lonnie Turner

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LonnieWA,

 

It has been at least 15 years since I dealt with any accounting procedures, I am not a CPA, and this is not an accounting/bookkeeping forum.

 

It is my vague recollection that credits increase asset accounts and decrease expense/liability accounts; while debits decrease asset accounts and increase expense/liability accounts. Now, with all those caveats, here is my suggestion for what it is worth.

 

Let's say that we sell on lease option at a strike price of $100K and receive $3K option consideration.

 

To record receipt of option consideration

  • Debit Deposit Payables: Option Payments Received $3000
  • Credit Bank Account: Cash $3000

When the option is exercised, we receive $97K cash:

  • Credit Bank Account: Cash $97K
  • Credit Deposit Payables: Option Payments Received $3000
  • Debit Sales: Rentals $100000

If the option expires:

  • Credit Deposit Payables: Option Payments Received $3000
  • Debit Forfeited Option Income $3000

Remember that it has been a very long time since I had any hands on accounting, and I am not a CPA. Consulting a CPA to set up your books and your chart of accounts might make your income tax reporting a lot easier in the long run.

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Guest Lonniewa

A debit increases an asset account and credit increase liability and equity account. As for as revenue and expense account I have forgotten and I need to track down my old text books.

 

Thank You Very much for your help.

 

 

LonnieWA

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Guest LonnieWA

At the very bottom when the option expires you created a "Forfeited Option Income" account. What type of income is it? Is it an asset account?

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A Revenue Account. Option consideration received is not recognized as income until the option expires. That's why I thought you might need a revenue account to offset the complementary entry that zeroes out the Deposit Payables: Option Payments Received account.

 

When the option is exercised, the option consideration received is included in the sale price of the property and is reflected in the Sales: Rentals (revenue) account.

 

If my recollection of the debit/credit affect upon asset and expense accounts is incorrect, just adjust accordingly. I did remember that debits have to equal credits, so I tried to suggest items in a chart of accounts that would sufficiently address your question.

 

Again, I reinforce my caution that this is not an accounting forum and the suggestions given thus far have been for educational purposes only and are not to be considered an adequate substitute for the opinion which might be rendered by a licensed accounting professional.

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Again, I reinforce my caution that this is not an accounting forum and the suggestions given thus far have been for educational purposes only and are not to be considered an adequate substitute for the opinion which might be rendered by a licensed accounting professional.

Great response and I love the disclaimer :lol: If I might ask, what kind of forum is tax strategies if not accounting?

 

Mike

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Mike,

 

The Tax Strategies Forum is meant to deal with the personal income tax treatments that may arise from your real estate activities and the income tax impact of certain investment strategies.

 

I personally use single entry accounting (Excel spreadsheets). If I were to use double entry accounting instead, the income tax returns would still look the same for my real estate activities.

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Guest Lonniewa

Taxman,

 

First I really appreciated you answering my other questions in this thread. I have just a couple more and then I will be ready to set up my books.

 

How do you handle the rent payments when you're a corp? Is this income considered investment income or income from a business? Remember, I am an investor in a sandwhich lease option.

 

As for as the rental income from my sub-tenant and my rental expense to my landlord:

Tenant pays me $1100/mo. So, I would credit Rental revenue & debit cash/asset account. And then when I pay seller I would debit rental expense account and credit bank/asset account. Right?

What do I do if part of the rental payment will be credit toward the purchase price as option consideration if they buy, and what entries do I make if they don't buy or do I just count all the payments as rental income?

 

Thanks to anyone who tries to answer this one. Anyone has a chart of accounts they would like to share?

 

Thanks,

Lonniewa

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Lonniewa,

 

These are excellent questions to take to your CPA. In a sandwich lease situation, your CPA may suggest that your accounting methods be set up in such a way that you do not recognize income until your sub-tenant buyer exercises his option and you are forced to exercise yours.

 

If this is the case, then all your rental "income" might accrue as adjustments to your cost basis (Cost of Goods Sold) and all your rental "expenses" are accruals to your holding costs and rolled up into Cost of Goods Sold. When all the options are exercised, then you recognize your income as part of your sale profits reported as ordinary income on your Schedule C and Schedule SE for that year.

 

Regardless of the account types you are using, remember that your debits must equal your credits. If you deposit the cash into your bank account then withdraw cash to pay your landlord/seller, then whatever is left over is either rental income or an additional deposit payable as additional option consideration received.

 

Your accounting problem is how to handle your accounting entries when your "rent credit" is larger than your "rental income".

 

I am out of my element at this point, and will defer further accounting discussion on this topic to your CPA.

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