I couldn't prove basis on the parcel I sold because all four shared an account

I hold raw land, long. Four parcels bought across about three years, all in one LLC, nothing built, nothing rented. Carrying costs are small and boring: property taxes, occasional mowing, a survey on one, a fence repair on another, annual state filing fee.

I hired a bookkeeper at $145 a month. Competent, responsive, kept the bank feed clean. She set up a single account called Land and a single account called Land Expenses, and every dollar across all four parcels went into one of those two buckets. I looked at the monthly P&L, saw numbers that were roughly what I expected, and signed off for two and a half years.

Then I sold one parcel. Buyer was fine, closing was fine. My CPA asked for the basis on that parcel specifically: purchase price, closing costs, and whichever carrying costs had been capitalized into it rather than deducted along the way. I could not produce it. The books knew what the entity had spent. They did not know which dirt it went into.

The reconstruction took me eleven evenings with old settlement statements, county tax bills and a bank download, and the bookkeeper charged $960 at her hourly rate to redo the entries. The survey was the worst part, because it covered two adjoining parcels and had never been split, so I had to allocate it after the fact and document why. My CPA also flagged that the capitalize-versus-deduct election on carrying costs for unimproved land is a real decision with real consequences and it had never been made deliberately, it had just happened by default in how things got categorized. That is a licensed professional's call and mine was made by a categorization rule.

What it cost: $960 plus a delayed filing plus eleven evenings I would rather have spent otherwise.

What I'd do differently. Every parcel gets its own subaccount on day one, with the APN in the account name. Every shared cost gets allocated at the time it's paid, in writing, with the basis for the split noted. And the capitalize question gets asked of the CPA before the first tax bill hits the books, not after a sale.

Answer

3dmitri_v6CapitalPRO6

The cause is in the engagement letter, and I'd bet money it says something like "monthly categorization and reconciliation of transactions in accordance with the chart of accounts provided by the client." Read yours. If it does, she did exactly what she was hired to do and the design of the chart of accounts was your responsibility by contract, which is why you got billed hourly to fix it rather than getting it fixed for free.

The fix is boring and it's a document. Before the first month closes, write a one page accounting policy for the entity and attach it to the engagement. Mine covers four things: the unit of tracking, which for land is the parcel and I use the APN because it never changes even when the address does, the treatment of shared costs with the allocation method named, which costs get capitalized to basis versus run through the P&L, and who signs off when something doesn't fit an existing rule. That last one is the one everybody skips and it's the one that catches surveys covering two parcels.

The capitalize-versus-deduct election on carrying costs for unimproved land is a genuine tax election, it varies with your circumstances and it is made on the return, so your CPA owns it and it should be written into the policy in their words, not yours. A bookkeeper categorizing a tax bill is executing that decision every single month whether or not anyone made it.

One more thing. Ask for a balance sheet by class or by parcel, whatever your software calls it, as a standing monthly deliverable. If it can't produce that report, the tracking isn't there and you'll find out in twenty minutes instead of at a closing.

6 replies

0priya_n21PO1C

$145 a month for two and a half years is roughly $4,350 of bookkeeping that didn't answer the one question you eventually needed answered. That's the number that stings, more than the $960.

3aaron_fitz10 Get yoursPRO6

Is the failure hers or yours though? She built what a general bookkeeper builds. Nobody told her a parcel is the unit of account. I'd have made the same setup and I'd have thought I was being tidy by not cluttering the chart of accounts.

1bmoreno23AB1B

I'm new to all of this, and what I hadn't realized before now is that the books have to be able to slice by property, not just by category. I assumed a P&L was a P&L.

0jordan_ellis2ActivePRO6

@warrant the one page policy is going in my folder before I buy anything. @orchard, did the delayed filing cost you anything beyond time, or was it just annoying?

1jessreyes12AU1APRO8

I want to ask the dumb version of @kestrel's question. If I hire a bookkeeper, am I supposed to arrive with a chart of accounts already designed? Because I would not know where to start, and I'd assume that designing it is what I'm paying for.