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Journal Entry for Sale of Property with Closing Costs

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Many businesses use property in their operations. Whether it represents an office where the business is conducted, a rental unit we’ve bought, or an investment that will hopefully grow in value, we will sell this property at some point. Either way, we need to make sure we know how to properly record journal entries for this sale and the closing costs, which we will address in this article.

The examples and discussion below apply to property or any other fixed assets, so keep that in mind going forward. We will explain how selling property affects your assets (what you own) and your cash.

Understanding the Accounting Process for Property Sales with Closing Costs

Property is normally considered a fixed asset (also known as Property, Plant, and Equipment). This is any physical piece of property or equipment that can be used for longer than a year and costs more than a certain amount. That amount varies by the size of the company and how frequently they buy equipment. 

How the property and equipment are used doesn’t affect the overall journal entries when we buy and sell them. Whether it be a laptop for your home office or a generator for a hospital, it’s an asset in our journals, and it sits on our balance sheet until we need to sell it.

When we buy or build a fixed asset, we spend money and gain an asset; the property is booked as a debit to our books. When we sell the property, the asset is credited since we’re removing it from our books. 

Typically, there are costs associated with selling a property. These are often the amounts we pay to a real estate agent or a bank to finalize the sale. When recording the journal entry for the sale of the property, the closing costs usually represent the difference between the selling price and the actual cash received (plus any outstanding mortgage). These costs are recorded as a debit, together with the final cash amount received and the mortgage relieved.

Journal Entry Example of Property Sales with Closing Costs

Scenario 1: Selling a property – no mortgage, no gain/loss

When we first bought the property, we would have booked a debit to the property and a credit to cash. To remove the property from our books, we’ll do the same journal entry but in reverse. 

For example, let’s say John sells a property worth $11,000 and receives $10,000 in cash. The difference, or plug, represents the amount spent on closing costs. There may be mortgages or even gains or losses in the value of the property, but we’ll address them in scenarios 2 and 3 below.

Journal Entry for Sale of Property with Closing Costs - no mortgages no gains or losses

In the journal entry above, John is debiting cash for $10,000, representing he received $10,000 cash in this transaction. John is also debiting Closing Costs for $1,000, which is the difference between the selling price ($11,000) and the actual cash received ($10,000). Accordingly, John also credits the property for $11,000 to remove the assets from his books. 

Scenario 2: Selling a property with a mortgage, no gain/loss

Mortgages are a commonly used form of financing in property transactions. The mortgage is a liability since it is a debt we owe to the bank or other institution. Our journal entry on selling the property is similar to the previous example but with one key change; in our example, we’ll assume that the property was bought without any cash, so we started out with a mortgage for the full amount.

In this example, John took out a mortgage for $11,000. By the time the property is ready to sell, let’s assume that there is $5,500 remaining on the mortgage. The selling price of the property is also $11,000, meaning John didn’t need to recognize any gain or loss.

John would pay off the mortgage after he’d received the cash, and the rest of the cash would come back to him as an asset. Any remaining difference between these amounts and the selling price we remove from our books will be the closing costs. 

Journal Entry for Sale of Property with Closing Costs - with a mortgage no gains or losses

In the journal entry above, John is debiting the mortgage for $5,500 as the outstanding loan balance is now paid off. He ended up with $4,500 in cash after the sale was finalized, which is a debit to his books. He also credits the property for $11,000 to remove it from the general ledger. As for the Closing Costs of $1,000 debited to his books, we are able to determine the amount because it is the difference between 1) the selling price of his property ($11,000) and 2) the payoff for the mortgage ($5,500) plus the cash he received ($4,500) after the sale is finalized. 

Scenario 3: Selling a property with a mortgage and a gain

Assume we all live in a healthy and growing economy; oftentimes, property appreciates, and a gain would be recorded when the property is sold.

Let’s use the same example as above, except John is selling the property for $20,000. To recap, he bought the property with a $11,000 mortgage, while $5,500 of the loan is still outstanding as of the sales day. John received $13,500 after paying off the $5,500 mortgage and the $1,000 closing costs. 

The gain is calculated as the difference between the selling price ($20,000) and the property value on the books ($11,000).

Journal Entry for Sale of Property with Closing Costs - with a mortgage with a gain

Like the scenario above, John debits the mortgage paid off for $5,500, the cash received for $13,500, and the closing costs for $1,000, which is the difference between 1) the selling price of $20,000 and 2) the $5,500 mortgage paid off & $13,500 cash received. On the credit side, he removed the property from his books ($11,000), as well as recognizing a gain of $9,000 (Selling price $20,000 – Property value on the book $11,000)

Conclusion

When it comes to selling property or other fixed assets, the journal entries are pretty straightforward:

  • Closing costs are typically the difference, or plug, between 1) the cash we receive from the sale plus any mortgage paid off and 2)the selling price of the property.
  • The journal entry we book is debiting cash, debiting mortgage paid off, debiting closing costs, and crediting property.
  • Gain or loss should also be recognized if there is any. It’s the difference between the selling price and the property value in the general ledger.

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