Figuring out Purchase price for CCA

[gsicilian]

We just bought a multiplex apartment building and as part of the closing documents at the lawyers part of the closing adjustments we received a deduction for the deposits the seller held for each tenant. The question I have is; Can I reduce the purchase price by this amount to set up my CCA account or do I need to treat these as revenue and not include these in the purchase price. My thoughts is that these amounts were probably already included in the sellers income statement when he first got them and the net effect is that it did reduce the purchase price at closing. I have had varying accountant recommendations, but thought i would open this up here for discussion.

Regards

 

[Thomas Beyer]

The security deposits are not revenue. They are liabilities, ie money owed to tenants when they leave. It is really the tenants' money, held in trust by you, or usually the property manager. Usually therefore you have two entries on your balance sheet, namely in the asset column and an equal amount on the liability side.



unclear why there is a deduction off your purchase price. The money should actually be added, ie given to you from seller. What you mean by deduction is probably a deduction off the cash owed by you to the seller, ie a credit to you.

 

[gsicilian]

Correct Thomas. So i.e. purchase price was $1M and there was $5K security deposits. Amount owed to seller $950K.



Therefore what you are saying is that the purchase price for CCA should be one million and the $5K should not be considered revenue but a liability on the balance sheet. Is this correct

 

[Thomas Beyer]

Exactly. A liability and also an asset as you must give this cash to your property manager or put it in trust separately from the rent collected. It is not your money. You owe it to tenant on move out , or frequently as a potential offset for damages, last months rent or other $s that tenant may owe you after move-out inspection.