Accounting Tutorial for a Home Purchase and Sale in Quicken with a HUD-1 form [Updated]
This tutorial is an update to the previous article with the same name. It describes the accounting for the purchase and the sale of a home in Quicken using the HUD-1 form. We will walk through the purchase of a property from the point of view of the Buyer who will purchase a house. We will describe a typical house payment on a mortgage for the property. Then we will look at the sale of the
same property from the point of view of the Seller, who will sell the house six months later. We will understand how the HUD-1 works and how it relates to Quicken transactions. Accounting for these HUD-1 expenses is important for accuracy and completeness, and because in many cases housing expenses and closing costs are tax-deductible.
Initially, you must set up the accounts in Quicken if you don’t have them already. For this tutorial, I created a bank account in Quicken called “My Checking”. You can use whatever names you want. I will start with an opening balance of $100,000. Next, I created a Property Asset account (“My House”), and another asset account (“Washer Dryer”) for personal property purchased along with the house. If you have a mortgage, you need to create a liability account(“Home Mortgage”). If your mortgage lender requires you to prepay taxes and insurance into a mortgage escrow account, you need to create an asset account for that in Quicken as well (“Home Mortgage Escrow”). I created a Net Worth report which lists all of these accounts in Figure 1 (Balance Sheet).
For this tutorial, you will need a basic understanding of double-entry accounting.
Double-entry accounting is based on a simple rule: for every transaction, there is an equal and opposite transaction.
So, for example, if I pay $50 for supplies, I subtract 50 from a checking account and add 50 to my supplies expense account. If I buy a copy machine for $250, I subtract 250 from a checking account add 250 to a copy machine asset account. Quicken utilizes double-entry accounting through Categories and Transfers. The check for $50 for expenses is categorized into an expense category. The check for $250 is “transferred” to a copy machine asset account in the Category field.
Purchase of the House
The first step in any real estate sales transaction is signing the contract. From an accounting standpoint, the transaction starts with the Buyer giving the Seller an Earnest Money Deposit, typically $1,000. This check is usually not cashed, and the amount is included in the down
payment. In Quicken, our first transaction is the check written to the title company for $1,000. In Figure 2 (My Checking Account), you can see the check as it appears in the My Checking account register, with a transfer to the My House account.
After this, the transaction goes into escrow, and from an accounting standpoint, nothing
usually happens until closing. Any checks written during this time for inspections or repairs are treated as ordinary expenses. Once the escrow closes, you are given a Settlement Statement (HUD-1 form) that lists all the transfers between Buyer and Seller, and all the closing costs such as escrow, title, and loan fees, that occurred as part of the escrow.
The HUD-1 is a standardized government form used in nearly all real estate transactions. You
may download one from the HUD website:
The HUD-1 uses the terms “Borrower” and “Seller”, but we will refer to them as “Buyer” and “Seller” because this is a more accurate description. You need to understand how the HUD-1 works in order to make sense of the upcoming Quicken entries.
The HUD-1 is basically a statement of the escrow for both the Buyer and Seller. On page 1, it
starts with Sections A to me for contact and reference information, but, we are only interested in starting with Section J (Summary of Borrower’s Transaction), and Section K (Summary of Seller’s Transaction), which you can see below in Figure 3 (Sections J and K).
Page 2 of theHUD-1 contains Section L (Settlement Charges), which is a detailed breakdown of
costs and prepaid expenses. The total of these is carried up to Page 1, Line
103 for the Buyer and Line 502 for the Seller.
There is a Page 3 of the HUD, but we are not interested in the Comparison of Good Faith Estimate
and HUD-1 charges since I doubt anyone inputs data from their GFE into Quicken
that needs to be reconciled. I don’t.
Looking closely at HUD-1 Page 1 in Figure 3 (HUD-1 Sections J and K), we see that Section J is the left column, the Buyer’s side, and Section K is on the right, which is the Seller’s side. On the Buyer’s side, the top part is Section 100, which lists the amounts due from the Buyer. These are additions to the escrow from the Buyer (+). The middle portion, Section 200, contains credits due to the Buyer and are subtractions from the escrow to the Buyer (-).
The bottom portion, Section 300, is either the cash in from the Buyer, or cash out to the Buyer, depending on the math in the immediately preceding subtotals (+)(-).