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I'm using gnucash to record the purchase of an investment property and some expenses that are considered part of the cost base of the property. These include:

  • Settlement costs
  • Stamp duty
  • Renovations completed prior to renting out the property

I'd like to align my accounting methods as much as possible to the local tax rules which, in Australia, mean that these expenses count towards the cost base of the property rather than being treated as an expense.

This is also useful from a reporting perspective because I generally don't want costs associated with obtaining an investment to show up in expense reports.

Suppose I purchase a property for $500,000 and spend $100,000 on these additional expenses. Currently I'm putting these additional expenses in the "expense" account (which is incorrect), so my accounts look like this:

Assets:
 - Property: 1 Property @ $500,000
Expenses:
 - Renovations: $100,000
Trading:
 - Currency: $500,000
 - Property: -1 Property

How do I set up / structure the accounts so that renovations are part of the cost base of the property, without artificially inflating the property value to $600,000 (which it may not be worth)?

1 Answer 1

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Renovations is a capital expense, which means it is against an asset account and not an expense account. So Renovations can either be an account under Assets, sub-account under Property, or just add to the value of the Property.

The value of the Property account is not it's current market value, but the book value. It is increased by spending on improving the property (e.g.: renovations), and decreased by the depreciation. When you sell the property, the difference between the actual market value you sold it for and the value in your books would be your gain (loss).

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  • I thought the idea was that the asset account should reflect fair value of the assets? That seems to be supported by (my reading of) this link. Your answer has made me realise there are probably some big gaps in my understanding of accounting practice.
    – quant
    Oct 20, 2023 at 9:26
  • @quant the asset can reflect whatever you want, but if you want it to track the current market value - you also need to track the current unrealized gain/loss.
    – littleadv
    Oct 20, 2023 at 16:49

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