A Manager’s Simplified Guide in Costing Real Properties in the Books

Costing is an important accounting step for businesses. Buying a commercial real estate Caloundra brokers offer involves a lot of processes and payments that need proper costing.

Knowing how to cost property in the books can help businesses save from penalties imposed by tax regulators. Aside from that, accurate costing can help managers asses the asset’s performance.

That’s why here’s a simplified guide for managers on how to cost real properties correctly.

The cost of the property

If you survey on the prices of various commercial property for sale Sunshine Coast QLD has to offer, these prices are called “market prices” or “fair market value.”

Aside from its fair value, you have to include directly attributable costs like the following:

  • Commissions for real estate brokers
  • Title search and transfer fees
  • Local assessment taxes
  • Surveying, clearing, and grading costs
  • Title insurance premiums
  • Unpaid taxes assumed by the buyer
  • Unpaid mortgage assumed by the buyer

The local authorities might impose other charges for purchases of commercial real estate Caloundra area. If those costs are necessary to bring the asset to its intended use, capitalised these costs to the land account. See more at Henzells

Estimated restoration costs

If the property’s formation is altered upon use (e.g. mining site), estimated restoration costs must be included in the cost of the land.

Environmental laws and regulations may require entities to restore the property after using it. Examples of these restoration costs are:

  • Costs to uninstall machinery or equipment attached to the land
  • Costs to restore the land into a fertile state
  • Costs to restore the site into an environmental reserve

The management must “estimate” future restoration costs by referring to current market conditions and applying inflation adjustments.

The amount capitalised in the account must be the present value of the estimated restoration cost.

Lease of commercial property

If the company decides to rent commercial property, the transaction would depend on the nature of the lease agreement.

If the property rented is under an operating lease, the lessee will recognise rent expense for rental payments to the lessor.

In contrast, a property rented under a finance lease requires capitalisation of a right-of-use asset and incurrence of the lease liability.

Lease of commercial spaces

Theoretically, leasing commercial spaces can lead to ownership in favour of the lessee. However, in practice, leasing commercial spaces do not lead to ownership.

If the company decides to lease commercial space, the company must only account for the monthly rent expense. There will be no capitalisation of a right-of-use asset because there is no transfer of ownership after the lease term.

Summary

The cost of land must include its purchase price at fair value, directly attributable costs, and estimated restoration costs. For a lease of commercial property, capitalisation is required if there is a transfer of ownership after the lease term.

Otherwise, leases of commercial spaces and leases without transfer of ownership will only result in the incurrence of rent expense.

Costing real property in the books can be a tedious task. But, a diligent manager must know how costing works. For more information about commercial real estate Caloundra has to offer, visit henzells.com.au now.