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- What Are Netting Escrows & How Does It Work?: The Best Guide - January 2, 2024
- The Secret About Prescriptive Easement: Top Guide 1 Must Know - December 4, 2023
- About Home Equity Loans In Texas And How Can One Obtain It - November 27, 2023
About Acquisition Cost
When you are buying a real estate property, you incur a lot of costs in the transaction.
Whether it be an individual or a corporation, it is important for you to know the acquisition cost incurred to complete the real estate purchase. In this post, we will learn what is an acquisition cost in detail.
What Is An Acquisition Cost In Real Estate?
The acquisition cost in a real estate transaction means the total cost incurred in a purchase of the property.
The acquisition cost amount is recorded by the individuals or corporations so that they can use it while filing for corporate taxes.
The acquisition costs are usually incurred by the buyer rather than the seller in which multiple costs are involved apart from the property sales price.
The acquisition costs include the price of the property, appraisal cost, credit check cost, hazard insurance, title fees, origination points, mortgage brokerage cost, environment report cost, processing feed, underwriting fees, and any other fees related to repairs or improvement of the property.
Example Of Acquisition Cost In A Real Estate
When a property is purchased, let’s say a property that was purchased at $500,000, that cost is what is going to become the asset value when we record that piece of property on the balance sheet.
However, there are other costs involved as well like appraisal cost which is approximately $600, so the amount that you are initially recording on the balance sheet is $500,600.
So you don’t just include the purchase price that is certainly part of it, however, you also include appraisal cost.
Example Of Acquisition Cost For Already Build Property
There are a lot of different types of costs that can be involved with property purchase.
The purchase price is going to be included in the property’s initial asset value in our example it was $500,000.
The second part included is any cost that is incurred to prepare the property like grading, development of the property are also going to be part of the asset’s initial value. Let’s say that you need to build new construction on that property which would cost around $150,000.
If you are applying for a mortgage then that is also going to increase the acquisition cost of the property.
Any closing costs related to the real estate closing like lender fees, appraisal value, lender fees, underwriting fees, etc.
Let’s say that the total closing costs for this transaction are $5,000. In this example, the total acquisition cost would be $655,000.
Example Of Acquisition Cost For A Piece Of Land
There might be instances where a corporate might be purchasing brand new land to build a plant or a building on that land, in this case, the cost of the land let’s say is $400,000.
And then the cost of clearing the land was $50,000. To have a building built you will have to hire an architect, and the cost of hiring architecture for the building was $50,000.
The total construction cost to build the structure came up to $200,000. Since you got it from a realtor’s reference the realtor brokerage charge was $2000.
And finally, you had any unavoidable interest that costs $40,000. In this case, the total acquisition cost for the entire transaction that you need to include in the records would be $742,000.
Conclusion
Just like real estate, the cost of acquisition is also used in other mediums as well like marketing and pieces of equipment.
However, it is important to know the total cost of acquisition of the real estate property as it will help you to understand the exact cost that you paid to acquire that piece of property.
Keeping a record of the cost of acquisition would also help you to file taxes.
