HOW TO SETUP QUICKBOOKS

FOR A REAL ESTATE LLC

COURSE TOPICS
 LLC Tax & Accounting Principles Based on Ownership & Tax Treatment
 Chart of Accounts for Real Estate Rental LLC
 Initial Accounting Entries
 Recording the Real Estate Purchase
 Entering Expenses and Rental Income
 Distributions to LLC Members
 Closing Journal Entries for the Year

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RENTAL REAL ESTATE LLC TAX PRINCIPLES
 Partnership Taxation
 The LLC files a Form 1065 annually and allocates net rental real estate income to the partners, so the members pay the taxes.
 Under partnership tax rules, the LLC can specially allocate items to the partners, it does not have to be in proportion to each members’
ownership percentage.
 S Corporation Taxation
 The LLC filed a Form 2553 to elect S corporation tax treatment.
 The LLC files a Form 1120S annually and allocates net rental real estate income to the members, so the members pay taxes.
 The net income and distributions must be in proportion to the ownership percentage of each owner. Special allocations are NOT allowed
for an S corporation.
 C Corporation Taxation
 The LLC filed a Form 8832 to elect C corporation tax treatment.
 The LLC files a Form 1120 annually and pays federal income taxes at the entity level. Any distributions to shareholders may be subject
to tax at the shareholder level, or at the entity level if the LLC is required to withhold taxes.
 Single-Member LLC That is A Disregarded Entity for Federal Tax Purposes
 The LLC does not file a tax return itself, as the income and expenses are reported directly on the owners’ federal tax return.
 If the LLC owner is an individual, the individual attaches Schedule E to their Form 1040 to report the rental income & expenses.

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RENTAL REAL ESTATE LLC ACCOUNTING
 Accounting for rental income and expense are largely going to be the same.
 Differences are in how income is going to be allocated to the owners and how to deal with taxes.
 LLC Taxed as Corporation (Form 1120)
 Net rental income (loss) is calculated at the entity level.
 Taxes, if applicable, are paid at the LLC level.
 The LLC books will contain accounts for federal and state taxes, while the accounting for a partnership or S corporation will not.
 LLC Taxed as Partnership (Form 1065)
 Net rental income or loss is calculated at the entity level.
 The net rental income (loss) is then allocated to each partner in accordance with the terms of the partnership agreement.
 LLC Taxed as an S Corporation (Form 1120S)
 Net rental income or loss is calculated at the entity level.
 The net rental income (loss) is then allocated to each LLC member in accordance with the terms of the LLC agreement.
 S corporations must allocate all tax items and distributions in proportion to ownership percentages.

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CHART OF ACCOUNTS
 The chart of accounts for the LLC will list all of the relevant general ledger accounts needed for the rental property business
 Balance Sheet Accounts
 Checking Account, Savings Account, Investment Account
 Buildings & Land, Accumulated depreciation, Accumulated Amortization
 Mortgage balance, Accounts Payable, Loans from Owners, Tenant Deposits
 Capital Contributions, Capital Draws, Member’s Equity, Retained Earnings
 Income Accounts
 Rental income, Other Income, Interest income, Dividends & Capital Gains
 Expense Accounts
 Advertising, Cleaning and Maintenance, Commissions
 Insurance Expense, legal and Professional Fees, Repairs and Maintenance
 Property Taxes, Utilities, Wages and Salaries
 Interest Expense, Contract Labor, Depreciation and Amortization Expense
 Landscaping Costs, Accounting Fees, Miscellaneous Expenses

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INITIAL ACCOUNTING ENTRIES
 Bank Account Opening
 Record the initial cash deposit to open the bank account
 Record any additional capital contributions by the members
 Record any loans from the members
 Real Estate Purchase
 How to record the purchase of the property
 How to decide the allocation between land and building
 How to record the mortgage balance on the property
 Initial Tenant Deposit and Rents
 How to record the deposit for first months’ rent with the deposit

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OPENING THE BANK ACCOUNT
 Example Step 1: Bob, Jane and Emily form Real Estate Ventures LLC (a Delaware LLC) on June 30, 2020, which is by default a partnership for federal
tax purposes. Each person owns a 1/3 membership interest in the LLC. Each person puts up an initial $1,000 cash, and Bob goes to the local bank to
open the account. Bob walks in with $3,000 and opens a regular checking account in the LLC name and employer identification number (EIN). While
at the bank, Bob thinks it is also a good idea to open a savings account with the same bank. Bob transfers $500 from the checking account to the
savings account on the same day. How is this recorded?

 Example Step 2: After the LLC bank account is opened for 15 days, each Member transfers $25,000 in additional capital contributions to the LLC. How
is this recorded?

 Example Step 3: Bob decides he is going to provide a short-term loan to the LLC of $10,000 at a zero percent interest rate just to cover any incidental
expenses. How is this recorded?

 Record the initial cash deposit to open the bank account

 Debit, Cash for $3,000

 Credit, Members’ Equity for $1,000 per member
 Record any additional capital contributions by the members

 Debit, Cash for $25,000 for each member

 Credit, Members’ Equity for $25,000 for each member
 Record loan from Bob as an LLC member

 Debit, Cash for $10,000

 Credit, Loans from Partners (Bob) for $10,000

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RECORD THE REAL ESTATE PURCHASE
 Example: The LLC purchased a single family residential property for $150,000 on August 31, 2020. The settlement charges attached to the sale total
$7,427.47, for a total purchase price of $157,427.47. Prior to the offer, the LLC paid a deposit of $1,000 to the escrow agent. The LLC obtained a loan
from a local bank for $100,000. Let’s look at the HUD statement and the QuickBooks file.

 How to record the deposit for the real estate offer

 Credit, Cash for $1,000

 Debit, Deposits for $1,000
 How to record the purchase of the property

 Debit, Building for the $157,427.47

 Credit, Real Estate Taxes for $235.87
 Credit, Mortgage Payable for $100,000
 Credit, Bank account for $56,191.60
 Credit, Deposits for $1,000
 How to decide the allocation between land and building (IRS Publication 527)

 If the Closing Statement or HUD does not specify an allocation, you can use your best estimate based on the recent property tax bill
 “The part of the cost that you allocate to each asset is the ratio of the fair market value of that asset to the fair market value of the whole property
at the time you buy it. If you aren’t certain of the fair market values of the land and the buildings, you can divide the cost between them based on
their assessed values for real estate tax purposes” (i.e., let’s look at the property tax bill)

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CALCULATE VALUE OF BUILDING & LAND
 Why does the allocation between the building and land matter for tax & accounting purposes?
 Residential rental buildings are depreciated over a 27.5 year lifespan.
 Land is not a depreciable asset.
 The LLC can maximize its yearly depreciation expense by increasing the value attributed to the building.
 Publication 527 “The part of the cost that you allocate to each asset is the ratio of the fair market value of that asset to the fair market value
of the whole property at the time you buy it. If you aren’t certain of the fair market values of the land and the buildings, you can divide the
cost between them based on their assessed values for real estate tax purposes” (i.e., let’s look at the property tax bill)
 We downloaded a property tax appraisal from the county website where the property is physically located. Most counties have this available.
 In 2020, the property tax appraiser website shows the total value of the property to be $98,095 in taxable value, which comprises $43,600
in land, and the building is worth $55,000.
 If we allocate the fair value percentages across the purchase price of the property, the breakdown is as follows:
 $88,266.58 allocated to the building
 $69,160.89 allocated to the land
 $157,427.47 total purchase price
 Let’s book our adjusting journal entry to reallocate the purchase price between the two assets.

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ENTERING EXPENSES & INCOME
 The LLC signs a rental agreement with a tenant starting November 1, 2020. The rental agreement provides that the tenant is going to pay $1,500 in
rent per month for a 12 month period. The first payment was $3,000 which includes first month’s rent of $1,500 and a security deposit of $1,500.
The terms of the agreement specify that the security deposit will be returned at the end of the lease, minus any amounts withheld for repairs,
maintenance, or past due rents.

 Bob takes the $3,000 check and goes to the bank to deposit the check. How is the deposit recorded on the books?

 Deposit of $3,000. Record the first month rent & security deposit in same transaction

 Debit, Cash (Asset) for $3,000

 Credit, Rental Income (Income on P&L) for $1,500
 Credit, Tenant Security Deposits (Liability) for $1,500
 What are some common expenses?

 Interest expense. The mortgage payment must be split between interest & principal. Let’s look at the amortization schedule.
 Landscaping costs. The LLC pays $100 per month for November and December.
 Renters Insurance. The LLC pays the insurance premium of $150 per month for insurance.
 Property Management Fees. The LLC pays $20 per month to a third-party property management company.
 Depreciation Expense (Non-cash expenditure). Building is worth $88,266.58, placed into service on September 1, 2020, and depreciated over a
27.5 year period. Under federal tax rules, the depreciation per year is $3,209.70, and the amount deductible for 2020 will be $937.

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DISTRIBUTIONS TO MEMBERS
 An owner of the LLC partnership is allocated the net income or expense from the real estate venture during the year.
 Excess cash can be distributed to the equity owners of the business as an owner distribution
 The Chart of Accounts should include an “Owner Draw” equity account for each partner. These accounts are closed out to each Member’s
capital account at the end of the year.
 Example: The LLC members decide that each owner will receive an owner draw of $100 on December 15, 2020. The payments will be wired
directly to the personal bank accounts of each owner. Let’s look at the entries for each owner.
 Emily
 Credit, Cash for $100
 Debit, Emily’s Draws (Equity) for $100
 Jane
 Credit, Cash for $100
 Debit, Jane’s Draws (Equity) for $100
 Bob
 Credit, Cash for $100
 Debit, Bob’s Draws (Equity) for $100

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CLOSING ENTRIES FOR THE YEAR
 Closing entries for the year for an LLC taxable as a partnership. Entries for an LLC that is taxed as an S corporation or a C corporation will
have different journal entries.
 Close out net profits (losses) to the Members’ capital accounts in accordance with their ownership percentages and allocations per the LLC
operating agreement.
 Close out current year Member Draws and Member Contributions to the Members’ capital accounts.
 The closing journal entry should be recorded on January 1, 2021.
 Each Members’ accounts have the following balances
 Capital contributions of $26,000
 Capital draws of $100
 Each Member receives an allocation of net loss for $115.27 (total loss of $345.81 dividend by three partners)
 Closing journal entries for each Member on January 1, 2021. Example for Emily.
 Credit, Emily Distributions for $100
 Credit, Retained Earnings for $115.27
 Debit, Emily Capital Contributions for $26,000
 Credit, Emily Capital for $25,784.73

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THANK YOU!

 Thank you for purchasing the course and sticking through to the end!
 I hope to see you again soon.
 Jason’s contact details

Email: info@knottpllc.com
Website: www.knottpllc.com

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