Q: How do I record the equity value in my real estate in my bookkeeping? I paid $200,000 10 years ago and now the market value is double that amount but there is nothing in my books to indicate this value. I’d like my bookkeeping to reflect the true market value of my properties.
A: Fair market value versus historical cost is a huge debate in accounting and you have put your finger on an important point. In your bookkeeping you are basically recording history; the transactions that have occurred such as purchases and sales are entered into your books. When you require the market value for refinancing etc., an appraisal of your property is necessary. This will indicate the market value of your assets. The bank will take this market value into account (they’re very good at this) and compare it with information from your reports. They will then determine the amount they are willing to lend.
Unfortunately, regardless of the amount of the increase in property value, the historical cost will not change (there are some minor exceptions to reporting values for financial statements but this rarely is applicable). That being said, if a decrease in the property value has occurred, a corresponding decrease in your accounting records will likely be appropriate. In this scenario, it would be best to consult with your accountant in order to record it appropriately.
For more information about bookkeeping for real estate accounting, check out Accountant in-a-boxTM.Tags: accounting, bookkeeping