The purchase of real estate is an exciting step for your business, but there are some key accounting considerations to address to ensure your financial records reflect the true economics of the deal. Properly recording the closing statement in your journal entries is one of them — and it’s critical. Whether it’s a $2 million multifamily asset or a $200 million office tower, the process of recording a purchase from a closing statement requires precision, judgment, and a deep understanding of both accounting standards and deal structure. Below we explore key components, common adjustments and best practices for aligning financial reporting with reality.
Before discussing the financial process, we should touch on the importance of connecting your deal and accounting teams to discuss the concepts of the acquisition at a high level. The result can be eye opening. For example, a client’s accounting team once recorded a purchase of a real estate asset as a simple asset acquisition with land, building and other assets acquired. However, once the deal and accounting teams sat in the same room and discussed the deal, the transaction proved to be only a purchase of the building’s leases — not the actual building or land. This resulted in a completely different presentation of the financials from how the accounting team had originally recorded the purchase. The takeaway is to keep your teams connected and communicating!
The closing statement, often referred to as the settlement statement or HUD-1, is a detailed summary of all financial aspects of a real estate transaction included in the purchase and sale agreement (PSA). Prepared by a title company, escrow agent or attorney and signed by both the buyer and seller, the PSA itemizes all the financial components of the deal, including:
For accountants, the closing statement serves as the primary source document for recording the acquisition in the general ledger.
The first step in recording your purchase is to thoroughly review the closing statement, including all agreements associated with the transactions, to ensure there were no last-minute changes to final closing statement amounts. If there were, your accounting team needs to understand the underlying reason. Once you clarify any discrepancies, verify the accuracy of the overall statement and ensure all amounts align with the purchase agreement and financing documents.
Below is an example of deal terms we will use to walk through the process of recording a property acquisition from a closing statement:
The full purchase price is recorded as the cost of the property, typically allocated to assets acquired. Assets include those such as land, building, acquired in-place leases, acquired above or below market leases, and are based on an appraisal for accounting principles generally accepted in the United States of America (GAAP) or cost segregation study for income tax purposes.
| Property (Land/Building/Acquired in-place Leases) |
$100 million | |
| Cash (equity contribution) | ($30 million) | |
| Mortgage Payable | ($70 million) |
Note: If the allocation between acquired assets is not yet available, such as if you’re waiting on the appraisal or cost segregation study to be completed, you may temporarily record the full amount in a single asset account and reclassify it later. You must complete the purchase price allocation before the financial statements or tax return is completed.
| Prorated Property Taxes | ||
| Property Tax Receivable | $500,000 | |
| Property | ($500,000) | |
| Prepaid Rents (Under GAAP) | ||
| Property | $300,000 | |
| Prepaid Rent Payable | ($300,000) |
Prorated items reflect the economic reality that certain expenses or revenues span the closing date. As a result:
These entries adjust the purchase price and establish liabilities or receivables, as needed.
| Property | $400,000 | |
| Accounts Payable | ($400,000) |
Certain closing costs are capitalized as part of the property’s cost under Accounting Standards Codification Topic (ASC) 805, Business Combinations and ASC 970, Real Estate-General, including:
Costs related to financing, such as loan origination fees, are not capitalized to the property. They are deferred and amortized over the life of the loan.
| Deferred Loan Costs | $700,000 | |
| Cash | ($700,000) | |
| Escrow reserves, e.g., for taxes or insurance, are recorded as assets: | ||
| Escrow Deposits | $1,000,000 | |
| Cash | ($1,000,000) | |
Loan-related costs are recorded separately and amortized over the loan term using the effective interest method.
Once all components are recorded, your accounting team reconciles the total debits and credits to ensure the entry balances match the cash disbursement on the closing statement and the bank statement. The total purchase price plus acquisition costs at this point must be allocated between the assets acquired. This allocation is necessary for depreciation and amortization purposes, as land is not depreciable or amortizable, while all the other assets are.
Several accounting standards govern how real estate purchases are recorded:
One of the most critical decisions in recording a property purchase is determining which costs should be capitalized as part of the asset’s cost and which should be expensed immediately. In January 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. This ASU applies specifically to an entity acquiring any type of real estate asset. It doesn’t matter what type of real estate is being acquired. If the asset or assets is concentrated in a single identifiable asset, for example, the building, it is not considered a business and asset acquisition accounting rules apply. A property acquisition would be accounted for as an asset acquisition; all acquisition-related costs are included in consideration paid and in the basis of the assets acquired.
Read “Should You Account for Your Real Estate Purchase as an Asset or Business Acquisition?”
In other words, generally, costs directly attributable to acquiring the property and preparing it for its intended use are capitalized. These include:
Costs not directly tied to the acquisition or that relate to operation, such as property taxes for the current period, are typically expensed.
If the acquisition qualifies as an asset acquisition, this requires:
For real estate companies, ASC 970 provides guidance on:
Once recorded, the property is subject to depreciation and impairment testing under ASC 360. Land is not depreciated; buildings and improvements are depreciated over their useful lives.
The allocation between assets acquired affects both depreciation and amortization. It’s typically based on:
Errors in allocation can distort financial results and the tax return.
If the property has existing tenants, the buyer may need to recognize:
Acquired lease intangibles are typically identified through a purchase price allocation (PPA) process and are amortized or accreted over the remaining lease term of the existing tenants.
Buyers often negotiate credits for deferred maintenance or capital improvements. These may be:
Establish a written capitalization policy and educate your team to distinguish between capital expenditures and expenses. In addition, develop a standardized acquisition checklist to ensure all components are reviewed and recorded, including:
Ensure alignment between accounting, legal and operations teams to:
Maintain clear documentation for:
Maintaining clear documentation supports audit readiness and internal controls. Best practices dictate the purchase price be allocated using a third-party valuation firm that makes the PPA compliant with the appropriate GAAP standards.
Use accounting software to:
Recording a real estate purchase from a closing statement is more than a mechanical exercise — it’s a strategic process that bridges the legal, financial and operational dimensions of a transaction. Done well, it ensures accurate financial reporting, supports investor confidence and lays the foundation for effective asset management.
As real estate deals grow more complex, accounting teams must stay sharp, collaborative and detail oriented. By mastering the art of translating closing statements into clean, compliant journal entries, real estate companies can turn the final step of a deal into the first step of long-term success.
Contact Nick Antonopoulos or a member of your service team to discuss this topic further.
In this blog Cohen & Co is not rendering legal, accounting, investment, tax or other professional advice. Rather, the information contained in this blog is for general informational purposes only. Any decisions or actions based on the general information contained in this blog should be made or taken only after a detailed review of the specific facts, circumstances and current law with your professional advisers.