Accounting for New Home Construction

Question

I am an avid Quicken user but am uncertain how to handle the costs of construction for a major addition to my second home to which I will be moving.  There will be major expenses to record.  Is best to just add categories to my existing account? Or should I open a separate Quicken account and even maybe a separate bank account to keep track of all these expenses?  Ideas and suggestions will be very much appreciated.

[Deleted User] · Answer

In respect to what @RalphC mentioned about taxes, I don't keep, or try to keep the cost basis for my house in the House Value account in Quicken.  It is not very user friendly for that purpose.  It is good for reporting the MV for your home and recording MV fluctuations, but not very good a keeping an accurate record of home improvements and cost basis. That is why I set up capitalized expense accounts for each home improvement that include details to help calculate an accurate cost basis if I ever sell the house.

RalphC · Answer

From a tax perspective, the "second home" is about to become your primary residence.  Assuming you already have both these properties as Assets on your books, I'd just record the expenses into an existing Home Improvement category(ies). The home improvement expenses will increase your cost basis for that property.  I'd use the Quicken tag feature to identify them for report generating purposes.

Now, if you decide to rent the other property, that's a different discussion which gets a little more involved.

[Deleted User] · Answer

@gksmith5 you can also capitalize the home addition expense - treating it as an asset rather than expense.

* Create an Asset Account:* Go to Tools → Add Account.
* Choose Property & Debt → Other Assets.
* Name it something like “Home Addition" or anything you like.  You can also set up separate asset accounts for each component of the project.

* Record the Expense:* Instead of categorizing a purchase, do a transfer to new asset account. This moves the money from a cash or checking account into the capitalized asset, keeping it off your income statement.

* Optional – Track Depreciation or Allocation:

* If you want to manually track depreciation, create a separate Category called “Depreciation Expense.”
* Then set up reminder transactions using this category, mimicking depreciation over time.

I have done this for several home improvement projects.  I have set up varying depreciation schedules the projects depending on what it is.  If there is a warranty period, I set the depreciation schedule for the same period length.

I don't like attaching home improvement projects to my home value account.  For that I strictly use published sources for the MV change.  From my own experience home improvements don't always equate to an increase home value.