QuickBooks for Rental Properties

This post will walk you through everything you need to know to set up QuickBooks for rental properties:

• Understanding the HUD-1 settlement sheet
• Setting up your rental property in QuickBooks
• Making the journal entry in QuickBooks

After purchasing an investment property, one of the most confusing parts of setting up that property in QuickBooks is correctly recording the information that is contained on the HUD-1 Settlement Sheet. Typically, any real estate transaction is going to include a HUD-1 which details the transaction for both the buyer (referred to as the borrower on the HUD-1) and the seller.

For every real estate investor, properly accounting for the items included on the HUD-1 statement is critical. The HUD-1 includes all of the information necessary to properly get your new property set up and established in your accounting system. I’m going to show you the steps I take in order to complete this task accurately. Let’s go step by step through a real transaction.

One quick note: This article was written based on using QuickBooks Desktop Pro for Windows. FYI, that’s an Amazon Affiliate link — if you click on it and make a purchase, a little bit of money comes back to me to help keep this site going. Unrelated, I 100% recommend using and learning QuickBooks!

Understanding the HUD-1 Settlement Sheet

The first thing we need to do is walk through the HUD-1 so that we understand exactly what is represented on this form. After we go through the form, we’ll take a look at how to make the appropriate entry into our accounting system.

Here’s an example of a real life HUD-1 from a transaction that I participated in:

As you can see, there is an awful lot of information included on the HUD-1. The buyer’s transaction is detailed on the left side of the form, and the seller’s transaction is detailed on the right side of the form. Let’s go through this transaction as the buyer, which was true when I completed this transaction.

The first thing we notice is the gross amount due from the borrower. This number represents the amount of money that the buyer needs to bring to the deal, before accounting for any credits or amounts paid on behalf of the borrower.

This amount comprises several items, the bulk of which is the contract sale price, or the amount that was agreed to as the sales price for the property. After all negotiations, this is the final price that was agreed to by the buyer and seller. In this case the price was $48,000. In addition to the contract sales price, any personal property that the buyer is paying for (if furniture was included in the deal, for example) would be detailed here, as well as any settlement charges that the buyer is paying — we’ll talk more about these later. Additionally, the buyer is responsible for reimbursing the seller for any items that the seller paid in advance. This is typically some sort of pro rata reimbursement for property taxes that the seller has paid. If the seller paid the full year’s taxes, the seller gets reimbursed for the portion of the year which s/he will not own the property — the portion of the year after the sale closes.

Using our real life example, the total gross amount of money I was required to bring to this deal was $50,662.79 — this is shown on line 120, here:

To recap, that amount includes the $48,000 sales price, the $817.08 in taxes I reimbursed to the seller, and $1,845.71 in settlement charges that I paid.

Now, if we take a look at the seller’s side of the transaction, we’ll see a gross amount due to the seller of $48,817.08. This represents the contract sales price plus the reimbursement for taxes that the seller paid in advance. Here’s what that looks like:

So, at this point, we’ve established the gross amounts for the buyer and the seller. The buyer in this transaction is required to bring $50,662.79 to the table (before accounting for any credit) and the seller will receive $48,817.08 (before accounting for any reduction in the amount due to the seller). The difference between those amounts represents the total amount of settlement charges being paid by the buyer. Let’s take a closer look at those charges now.

The $1,845.71 in settlement charges being paid by the buyer largely consists of items such as recording fees, title insurance, transfer taxes, etc. These items are detailed on the second page of the HUD-1, which you can see above. In this case, I was responsible for paying the following settlement charges:

• $500 for a broker’s commission
• $698.96 for title insurance
• $166.75 in recording charges
• $480 for transfer taxes

At this point, we’ve essentially cleared all of the items represented in the Gross Amount Due from the Borrower and Gross Amount Due to the Seller sections of the HUD-1.

Now let’s take a look at the amounts that impact the net amounts that are due from the buyer and due to the seller. These can be found in the 200 and 500 sections of the HUD-1:

Let’s start with the buyer’s side of the transaction. These numbers effectively reduce the amount of money that the buyer is required to bring to the table for closing.

The first item to note is the earnest money amount. This is often called a deposit or hand money. This amount is deposited with the broker when an offer is made on a property and is used to essentially show good faith on the part of the buyer. When a buyer makes this deposit, the amount remains on the buyer’s balance sheet as an asset, it has simply shifted from cash in a checking account to money on deposit with the broker. This is an important point to remember when we talk about making the entry in QuickBooks. For now, it’s important to know that the buyer has previously given this money to the broker — so now at the closing table, this amount is credited to the buyer against the total amount required to bring to the closing. In this example, I made a $1,000 earnest money deposit so at closing I am being credited back that $1,000.

The next amounts being credited back to the buyer are under the heading Adjustments for Items Unpaid by Seller. The buyer is responsible for paying all bills that are received after closing. In this section, the seller is reimbursing the buyer for charges that have been incurred but did not yet require payment — this includes items such as partial year’s real estate taxes, any monthly bills, etc.

In our example, the seller is reimbursing to the buyer the following amounts:

• $26.73 for city/town taxes
• $15.80 for county taxes
• $6.69 for annual assessments
• $515 for the tenant’s security deposit the seller was holding
• $356.45 for a partial month’s rent

These items total to $920.67. Taken in conjunction with the $1,000 earnest money deposit, I was credited back $1,920.67 which reduced the total amount of money I was required to bring to the closing from $50,662.79 to $48,742.12.

If we take a look at the seller’s side of the transaction, we’ll notice several entries which similarly reduce the amount due to the seller. Much like the buyer, the seller pays settlement charges related to the transaction. Typically, the seller pays the bulk of these charges, and that is true for this transaction. The seller is paying a total of $5,771.31 in settlement charges, broken out as follows:

• $4,200 for commission
• $150 for closing fee
• $200 for document prep
• $20 for notary fee
• $110 for lien letters
• $15.50 for overnight mail
• $480 for city/county/stamp tax stamps
• $595.81 for a home warranty

The seller in this case also had an outstanding mortgage in the amount of $31,828.20, so this further reduces the amount of money the seller will receive. The next item we see is the same $1,000 earnest money deposit that showed up on the buyer’s side. After this is a number of adjustments under the heading Adjustments for Items Unpaid by Seller which mirror the items from the buyer’s side — these entries essentially transfer these amounts from the seller to the buyer.

All told, the amount due to the seller was reduced from $48,817.08 to $9,296.90. So even though they sold the house for $48,000, the seller walked away with less than $10,000 after closing on the sale.

Ok. Tired yet? That was a lot of information but it’s important to understand what’s happening on the HUD-1 statement so we can properly record it in QuickBooks.

Setting up your rental property in QuickBooks

Let’s talk about QuickBooks now and how to make this entry.

We are going to enter all of this data on one journal entry, but before we can do that we’ll want to make sure we have our property set up in the system.

The first thing to do when setting up the property in QuickBooks is to create the needed account. Generally speaking, a handful of fixed asset accounts will need to be set up for the property. In my case, I established the following accounts:

• Real Estate Assets – this is a fixed asset account with sub-accounts for each property.
  • A building fixed asset sub-account
    • A cost fixed asset sub-account for the building
    • An accumulated depreciation fixed asset contra account for the building
  • A land fixed asset sub-account
    • A fixed asset sub-account for the land specific to the property

That might sound confusing, so let’s look at what this actually looks like in QuickBooks. Open QuickBooks and press CTRL + A to open the Chart of Accounts. Here’s what these accounts look like in my Chart of Accounts:

As you can see, the Total Real Estate Assets accounts encompasses both improvements (building) and land. It is necessary to break out the building from the land because the land associated with a rental property is not depreciable. The building will be depreciated over a period of 27.5 years, but the land cannot be depreciated and must be held on the balance sheet at cost.

The other main point I’d like to make about setting up the rental property in QuickBooks is about using classes as a way to provide property-specific reporting. Here’s how to create classes in QuickBooks:

Click on the Edit menu and the select Preferences. That will bring up a window that looks like this:

Click on the “Company Preferences” tab. In the Class section, check the box next to “Use class tracking for transactions”. I also like to check “Prompt to assign class”. That way, if I forget to assign a class, the program will prompt me to do so.

Next, you’ll need to go to the Lists and select Class List:

This will bring up the Class List dialogue box. When this box appears, press CTRL + N to enter a New Class. You should see the following box:

At this point simply type the name of the class and click OK. This will create the class in QuickBooks. Now the next time you make any entry related to that class, in this case our class is a specific property, make sure that you include that class in the expense entry. This will allow you to run class-level, specific reporting. Trust me, it’s a super handy feature and you’ll be glad you set it up from the beginning.

Now that we have our accounts set up and have established a class for the property in QuickBooks, it’s time to get to the point: how am I supposed to make this entry into QuickBooks to properly record all of the activity on the HUD-1 settlement sheet? Let’s talk about how to make the journal entry.

Making the journal entry in QuickBooks

Now we’ve finally come to the heart of the matter: how do we record all this information in QuickBooks? Get ready to make friends with the journal entry.

To being making this journal entry, click on the Company menu and then select “Make General Journal Entries”. This will bring up a window that looks like this:

This journal entry window is fairly simple but includes all of the items we need to make sure the HUD-1 gets recorded correctly. In order to help make the process a little more understandable, let’s look at the actual journal entry I completed to record the HUD-1 for the purchase we’ve been discussing:

Looking at this journal entry from left to right, the first thing we notice is the list of accounts that are impacted. There are seven accounts in total that are impacted in some way by this single journal entry. We’ve already discussed some of these accounts when we talked about setting up QuickBooks for rental properties above (land, building, etc.). The other accounts we have not explicitly discussed, but similar accounts will likely need to be established (operating account, taxes, security deposit, etc.). Some of these will be asset or liability accounts, some will be income or expense accounts. The first one to talk about is the checking account.

We’ll talk about debits and credits in another post, but for today you need to understand that the checking account is an asset account and that asset accounts are increased with a debit entry and decreased with a credit entry. The credit entry for $48,742.12 exactly matches the amount from the HUD-1 that was owed from the buyer. This is the money that I brought to the closing. In this entry I am recording that money leaving my checking account.

The next three entries are also being made to asset accounts: land, buildings, earnest money deposits. We are debit the land account in the amount of $9,200. This amount was taken from the county assessor’s website. You’ll need to decide how you want to arrive at a fair value for the land portion of your real estate. Using the assessed amount from the county is one reasonable approach. The building account is being debited in the amount of $41,462.79. This amount includes the purchase cost less the amount for land, as well as some other initial expenses that can be included in the cost of the building and depreciated over the same 27.5 year period. More on that in another post.

The last entry to an asset account is a credit for $1,000 to the earnest money deposit account. If you’ll recall earlier, I mentioned that we made a $1,000 deposit for earnest money, or hand money. This money was held in trust by the broker until closing. When that money left my checking account and went to the broker, I credited my checking account for $1,000 and debited the earnest money account for $1,000 – this created a balance of $1,000 in the earnest money account on the balance sheet. By crediting the earnest money account for $1,000 here, I am recognizing that the money has left my balance sheet and gone to the seller – I’ve zeroed out the account on the balance sheet.

Next we see three credit entries for tax expenses. These might look a little funny, after all a credit entry decreases an expense account. But if you recall from the HUD-1, I received credit from the seller for these tax expenses. By credit the tax expense account, I am recognizing that “income”. Essentially, we are showing a negative expense. Later in the year when I pay the full tax amount, the net is what my property tax deduction should be.

After the tax entries, there is an entry to credit the security deposits held account. Security deposits are a liability and liability accounts are increased with a credit. So this entry increases the security deposits liability on the balance sheet.

Finally, we have a credit to increase the rental income account by the amount received from the seller for part of the month.

There you have it! You should now have a basic understanding of how to understand a HUD-1 settlement sheet, how to set up QuickBooks for rental properties, and how to make the journal entry to record the information on the HUD-1. Every situation is unique and each purchase will be a little bit different, but this should allow you to have a solid foundation.