Bookkeeping accounts for rent-to-own property
I own a house which I'm renting to tenants. We've entered a long-term rent-to-own contract, where the principle portion of each mortgage payment becomes potential equity for the tenant. How do I handle this in bookkeeping?
I would think that I'd create the future sale as an Asset account, decreasing from the value of the sale price, and my tenant's potential equity would be a Liability account which grows from zero. However, since I would be crediting the future sale Asset, I would need to debit the Liability, decreasing it.
I could create my tenant's potential equity as an Equity account, which decreases from zero into negative numbers, but since it's potential equity (realized when he either gets a mortgage and purchases the house, or his potential equity reaches the sale price), that seems wrong.
What is the best way to do this?
(1)1 Comments
Sorted by latest first Latest Oldest Best
As far as I'm concerned, 'treating the principle like their equity' is exactly how a mortgage would normally accounted for. Consider the history of the transaction:
First, you debit your loan asset, and credit the value of your house [defined by the amount of the mortgage]. In a 'regular' mortgage, a bank would credit their cash handed to the buyer, who will pay the seller. In this case, it is the house itself which you are giving up, not cash.
Each month, you will debit the cash received from the tenant, and credit 2 accounts: Interest Income, and Loan Asset.
By the time the tenants have paid the full value of the house, you will have total cash equal to the value of all payments, historical interest income equal to the interest-portion of all payments, and zero loan asset.
If they happen to break the terms of the contract or for whatever reason do not finalize the deal to purchase the house, you will debit the full value of the house as an asset [at the value you initially assigned in the mortgage], credit the value of your Loan asset for whatever Loan is left, and the remaining credit will be a gain on the income statement.
Don't record the "Equity" for the client; that's the entry which would go on their books, not yours. Although, their "equity" will be equal to the value of all principal paid to you thus far.
Terms of Use Privacy policy Contact About Cancellation policy © freshhoot.com2025 All Rights reserved.