Book keeping setup for real property depreciation

Question

I have a rental property. I'd like to set up my books such that:

1. the cost basis depreciable value of the house is reflected in an account,
2. the annual depreciation is recorded sensibly,
3. the initial sale price is readily reportable, and
4. the balance sheet shows the (approximate) market value of the property were I to sell it today.

Is there a standard pattern for this? Objectives 1 and 2 together are straightforward, as are 3 and 4. However, combining all four into one set of books isn't obvious to me. One approach would be to record it as a set of assets, like:

• Assets:RentalX:Cost Basis
• Assets:RentalX:Land
• Assets:RentalX:Market Valuation

I'd then record the cost basis as the opening balance in the first account. The remainder of the purchase price would go in the Land account. Depreciation would be expensed from the Cost Basis account annually and offset by a symmetric entry in Market Valuation (as a transfer to retained earnings or some other equity account?). Periodic updates to the plausible market value of the property would also get recorded in Market Valuation.

Is this a reasonable solution? Or is there a more standard way to do this?

Answer 1

“Market value” in this instance is synonymous with the sum of the depreciated basis value of the property and the projected unrealized gain or loss. Here's the account sketch that seems to fulfill the above requirements:

• Assets
  • Fixed
    • House X
      • Basis
      • Land
  • Other
    • Unrealized G/L
      • House X
• Equity
  • Unrealized G/L
• Expenses
  • Depreciation

Annual depreciation would be recorded as a debit from the Basis to the Depreciation expense. Periodically the market value change would be reflected as a credit or debit from the Unrealized Gains/Losses asset account to the corresponding equity account. Because it's a long-term investment, recording that as equity rather than income seems appropriate since it'd more useful for these purposes for it to show up on a balance sheet than an income statement.

The market value is not immediately apparent but can be easily calculated by adding together the asset accounts. This could be changed by moving the UG/L asset account for House X to under the corresponding Fixed asset parent account, but I think for my purposes keeping the unrealized assets under a separate subtree makes for easier report generation.