Real estate investment may have inherent risks and require significant capital, but if done the right way, can have substantial rewards. Some even hailed it as their way to build wealth and beat market inflation.  

There are several kinds of real estate investment, each holds different risks and potential returns. In this blog, we will introduce and discuss the accounting treatments of two of the most common real property investments: rental properties and real property development. 

Rental Properties 

Rental properties are real estate properties that are rented for residential or commercial purposes. Its owner or landlord retains ownership while collecting rent from its tenants. The landlord manages the property, including its repairs, utilities, maintenance, documentation, and tax related payments. Rental properties can provide a steady and semi-passive income to its owners or investors. 

Real Property Development 

In this type of investment, developers will acquire real estate properties, develop them at minimal cost to increase their value, and sell them at higher prices. The intention is to generate income from the sale of real estate properties in a short period of time.  

This is more complex than rental properties since you will need experience in estimating the costs that it will take to develop or renovate a property, understand the market and building codes, find a buyer, and ensure that the entire venture will result in profit once the property is sold.  

It can provide a higher margin of income, but is riskier, requires a larger amount of capital, and deeper understanding of real estate properties. 

Difference in Accounting Treatment 

Aside from the difference in how these two types of real estate investment generate income, they also have very different accounting treatments. 

Asset Classification 

In rental properties, the real estate properties are classified as long-term fixed assets either as land or building.  

While for real property developers, they treat their real properties as short-term assets held for sale and are presented as part of their inventory.  

Expenses Incurred after Property Acquisition 

Succeeding costs incurred for repairs, utilities, loan interests, and maintenance are expensed outright for rental properties. For real estate developers, all these expenses are capitalized and is included as part of the value of the property under inventory. 

Sale of Real Estate Properties 

Landlords generate income through periodic rent payments. But that does not stop their property from appreciating in value. If they sold their real estate properties in the future, any income or loss from its sale will be reported as part of other income and is subject to capital gains tax. 

Real estate developers on the other hand, generate income only when a property is sold. The difference between the selling price and the accumulated costs of the property is reported as part of their operating income or loss and is subject to regular income tax. 

Be sure to apply the proper accounting principles to your real estate investments. It does not only keep you compliant with the regulatory requirements, but it also provides you with the right insight into the overall financial health and performance of your investments. 

Want to learn more? 

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