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).
**Figure 1**
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.
**Figure 2**
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:
https://www.hud.gov/program_offices/administration/hudclips/forms/hud1
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 (+)(-).
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On the Seller’s side, it is the opposite. The top part, Section 400, is amounts the Seller takes out of the escrow (-). The middle part, Section 500, contains credits the
Seller is giving to the Buyer (+). The bottom part, Section 600, is the Seller’s cash-in/cash-out (+)(-).In order to properly account for the HUD-1 line-items in Quicken, it is helpful to think of the escrow as a separate entity and the HUD-1 as a statement of accounts in the
Looking at Section J, “Summary of Buyer’s Transactions” below in Figure 4 (HUD-1 Section J (Buyer), we need to determine how the HUD-1 line-items relate to our accounts in Quicken.
escrow. So, using double-entry accounting, if you are putting something into
the escrow, you must be taking it out of somewhere in Quicken; and, if you are
taking something out of the escrow, you must be putting something into an
the account in Quicken.
You can see in Section 100 that for every amount due from the Buyer that’s an addition to the escrow, you must have a corresponding deduction from a Quicken account (double-entry accounting).
In Section 200, every credit the Buyer receives in the sale must be marked as income or assigned to an account in Quicken.
Finally, in Section 300, cash in or cash out will be a corresponding entry in My Checking account as a check or deposit, respectively.The HUD-1 form represents the escrow accounting for the asset, “My House”, so each line-item in the HUD-1 will have a corresponding line-item in the My House asset account. We will put all the related entries for the purchase into a split transaction in the My House account. If the escrow cashed your Earnest Money Deposit check, you must create a check entry for that, and create a separate split transaction for the
Down Payment check. If they destroyed your Earnest Money Deposit Check, we will
use that check’s entry for our split transaction, which is what I have done for
our tutorial.We open the entry for the $1,000 Earnest Money Deposit in the My House account and make it a Split Transaction. You can delete the line-item for the Earnest Money Deposit in the split if you want to keep things in order, and we will add it back later. If
they cashed the Earnest Money Deposit check, your split will look different.The entries in this split transaction will correspond to the entries in Figure 5 (Section J of HUD-1). The first line-item in Section J is Line 101 “Contract Sales Price” ($120,000). We will not create a line-item for that. When we input all the other line-items, and we close the split window, this amount should appear as the total of all our splits. This way, we can reconcile our splits, and the single line-item initially in the My House asset account will be the Contract Sales Price.
Line 102 is for any personal property included in the sale, in this instance a Washer Dryer. You want to have the value from this line in a Quicken asset account. Remember we are adding to the escrow here for the price of the personal property. This means we need to subtract from the Quicken site. You can see the Quicken side below in Figure 6 (Buyer Splits).
Here’s where our double-entry accounting comes into play. If you were to buy a Washer asset normally, you would deduct cash from your checking account and add it to your Washer asset account. But here, it is deducted from the My House asset account and added to the Washer asset account. Therefore, our entry in Quicken for line 102 of the HUD-1 is negative.
Since I have assigned a value of $250 for the washer, it will appear as -$250
in Quicken in the My House split transaction. This seems the opposite, but remember, the amount in the Washer Dryer asset account from the Split transfer will be positive, which makes sense.Next, we look at Line 103 “Settlement Charges” to be paid by Buyer. This is the sum of all the charges that appear on page 2 of the HUD-1. Since we want to account for each of these charges individually, and in order, they appear in the HUD-1, we are going to skip that for now, and then start those entries when we get to Line 10 of the Buyer Splits.
Lines 106 through 112 in Figure 5 are for items which the Seller has paid and the Buyer must reimburse. In our tutorial, the escrow closed on October 1, 2016. The Seller has paid the full year’s taxes in January 2016, so in Line 107, the Buyer must
reimburse the Seller for the taxes after the sale in October, for the period from
October to December ($150). There is a corresponding entry in line 407 on the
Seller’s side of the HUD-1.In Section 200 of the HUD-1 page 1 (Figure 5), we have “Amounts Paid by or on Behalf of Buyer”.
These are Buyer credits to the escrow and are subtracted from the Buyer’s escrow
obligations. If you remember from Figure 4, these are items that are added to
Quicken.Line 201 is the earnest money deposit of $1,000 which is transferred in from My Checking account (Figure 6). You recall we deleted this amount earlier, and are now
entering it back in.Line 202 is “Principal Amount of New Loan(s)” and is the mortgage amount paid by the lender. As Buyer, this is a transfer from the Home Mortgage liability account of $80,000 (you increase a liability with a negative number, so the double-entry here is positive). Line 203 is used if you are assuming the existing loan, and you would treat it as line 202. Lines 204-209 are treated the same as the others in this section,
just linked to different accounts accordingly.Lines 210-219 “Adjustments for Items Unpaid by Seller” are used to reimburse the Buyer for future Seller obligations that the Buyer must pay after taking ownership of the property. In the example, there is $100 in Line 214 for “HOA Dues” (and a corresponding entry in Line 514 for Seller), which are future HOA Dues payable at the end of the year by Buyer.
This is reimbursement for future payment of a past expense and is linked to an expense account. But, since you are decreasing the expense, it is a positive number. (Increasing an expense is a negative number since the cost is deducted from an asset.) All the lines 210-219 are treated the same way.
In Section 300, line 303 is the net amount you must put in, or in some cases take out. If you are putting money in, the money will likely come out of your checking account.
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Next, we need to take a look below on page 2 of the HUD-1 Figure 7 (HUD-1 page 2). These are the items that go into line 103. I skip down in the split window to line 10 to
input the page 2 items. Section 700 is for real estate commissions. Since these aren’t usually paid by the Buyer, there is not a line-item here for that.Section 800 is closing costs. I will use the Line 804 “Appraisal Fee” for the tutorial ($500). You can treat all the other charges in this section the same way. You can see in Figure 6 Line 10 the entry in the split transaction.
We have an entry for the -$500 categorized as “Home: Closing Costs” expense.
In Section 900, we have prepaid expenses. You could set up a prepaid expense liability account, but it is just easier to account for the expenses now. Thus, line 901 prepaid interest (-$75) and line 903 prepaid insurance (-$200) are put in the split as
expenses to “Home: Mortgage Interest” and “Home: Home Insurance”, respectively.In Section 1000, these are prepaid reserves that go into your escrow account. In the example, we have -$625 transferred into “Home Mortgage Escrow”. The remaining charges on Page 2 in Sections 1100, 1200, and 1300, are all expenses that we treat the same as the other expenses here.
We now close the split window and the resulting amount should equal our Contract Price.
A Typical House Payment
Our next step is to make a typical house payment using the various accounts. The split transaction shown in Figure 8 below is from the mortgage payment from the My Checking account in the amount of $1,200. It shows a $1,000 payment to pay down the mortgage principal on the Home Mortgage liability account, $50 to the Mortgage
Interest expense account, and $150 to the Home Mortgage Escrow asset account.
For the tutorial, the Buyer holds the property for six months and makes five monthly
payments.Since taxes and insurance are paid by the Mortgage Company from the Home Mortgage Escrow account, it’s best to have a corresponding entry in that account categorized as taxes or insurance so you can track these expenses.
You can see an example in Figure 14, below. I also reconcile the mortgage
principal and escrow accounts each month from the lender’s statement.Sale of the house
Now we move on to selling the house. In our example, the sale occurs on April 1, 2017, six months after the
purchase. The sales price is $150,000, so there is a $30,000 appreciation.
Let’s look at the Seller’s part of the HUD-1, Section K. You can see in our
the example below in Figure 9 (HUD Summary of Seller’s
Transaction) that the Seller has similar, but slightly different, closing
costs, which we treat in the same way.In Section 400, we have Line 401 “Contract Sales Price” which is for the sale price ($150,000). Line 402 “Personal Property” is for the Washer Dryer ($250). The next section, “Adjustment for Items Paid by Seller in Advance”, in this example, is for taxes paid by the Seller at the beginning of the year, for which the Seller gets credit for
taxes accruing after the sale ($450).Line 402 is the sum of the HUD-1 Page 3 expenses below in Figure 9 (Settlement
In Section 500, we have Line 504, the payoff to the mortgage company ($75,000).
Charges – Seller). They are similar to the Buyer’s expenses, except for the largest difference, which is Line 703 “Commissions Paid at Settlement” ($9,000). The other closing costs are treated the same as Buyers.
Line 514 is the Seller’s portion of the HOA dues the Buyer must pay at the end
of the year, for the time Buyer will own the property as the HOA dues accrue.We put the Seller’s HUD-1 line-items into Quicken below in Figure 11 (My House Account Register). The Seller’s transaction is made opposite to the Buyer’s by Quicken. Seller’s transaction decreases the balance while the Buyer’s transaction increased it. This means that the Seller’s split sales the transaction will look just like the Buyer’s split purchase transaction (Compare
Figure 12 (Sale Split Transaction) and Figure 6 (Buyer Splits)).
Looking at the Quicken split transaction below, it reflects the Seller’s HUD-1 line-items in Figure 12 (Seller’s Split Transaction). Since they are already discussed above for the Buyer, they won’t be repeated here.After the sale is complete and you close the sale Split Transaction, the amount should equal the sale price. You can see the line-item for Appreciation if you sell the house for more than you purchased. If you sell for less, use a Depreciation Payee and Category. The My House account register should look like Figure 11 above, with a zero balance.
You can also track the current value of the home asset. Some real estate websites, such as Zillow, will send you regular reports on the value of the property. You can enter the difference between this value and the purchase price into the Appreciation/Depreciation account to give you an updated home value.
Let’s see how the Split Transactions affected the other accounts. Here is the My Checking account register. You can see the down payment, the house payments, the HOA payment, the sales proceeds, and the escrow refund.
In the Home Mortgage Escrow account register below in Figure 14 (Home Mortgage Escrow), you can see the payment made from escrow and the escrow portion of house payments that were made. In the tutorial, the lender paid $600 in property taxes on your behalf. When we sold the house, they gave us the remaining balance of $775 as a refund, a transfer to My Checking.
The following is the Home Mortgage account register in Figure 15 (Home Mortgage).
You can see the original loan, the payments, and the final payoff.
Figure 16 below (Home Transaction Expenses) contains a report for the itemized Home expenses for the purchase and sale transactions costs.
There are no further transactions for the house. Your balance sheet should now have all the Home related accounts zeroed out and the sale proceeds in My Checking account.
[Original Post and Content by "Joshua"]~~~***~~~-4