What every investment property owner must know

As I have been travelling through the boulevards of Jacksonville, FL I have seen countless fallen trees, damaged roofs and (windtorn) blown off siding. All of this damage has inspired me to reach out to the investment property owners in Texas and Florida who have experienced damage due to the recent hurricanes.

Due to the magnitude of the damage to our nation, it may be quite some time before you will receive your insurance proceeds. So, how do you record your repair costs in the meantime? Because, let's face it, you have to get your property up to par for incoming guests. And how do you record the receipt of insurance proceeds when they finally arrive? Will the value of your property change?

Here's a sample scenario:

Suppose the roof of your beachfront cottage was damaged during the storm. Your contractor comes out and says that the roof needs to be repaired and it will cost $10,000. Since you need to get the repairs done as soon as possible, you pay your contractor now.

Debit: Repairs of Damaged Property $10,000

Credit: Cash $10,000

Finally you receive your insurance proceeds, but you only receive $9,000 because well...we know how insurance companies are.

Debit: Cash $9,000

Credit: Repairs of Damaged Property $10,000

Debit: Gain/Loss on Insurance Proceeds$1,000

Note: If the Insurance proceeds were more than the what you paid out of pocket for repairs, then you would credit the excess amount to "Gain/Loss on Insurance Proceeds"

Hopefully, this is not the case, but what if your property is a total loss?

Here's how to record this:

If your beachfront property cost you $1.5 million with accumulated depreciation of $500,000. You would remove the property from your books as follows:

Credit: Building $1,500,000

Debit: Accumulated Depreciation $500,000

Debit: Gain/Loss on disposal of assets $1,000,000

When you receive your insurance proceeds in the amount of $900,000, this is how you record the loss:

Debit: Cash $900,000

Credit: Gain/Loss on disposal of assets $900,000

If you should choose to rebuild your investment property and the cost to rebuild is $1.2 million, you would record it as follows:

Debit: Building $1,200,000

Credit: Mortgage or Cash $1,200,000

Especially since we are nearing the end of a tax year, it is especially important to not record an Accounts Receivable for expected insurance proceeds. There is no guarantee that the insurance company will pay and there is no solid way to know the exact amount of proceeds in advance.

My thoughts are with all those affect by the recent storms and I hope that you and your families are all safe. Remember, things can always be replaced, but our lives cannot!

#JournalEntries #Insurance