Connect with us

Costs Incurred To Sell Or Rent Of A Real Estate Project



In real estate properties that are intended for rent or sale after development is completed, leasing and selling activities generally occur throughout the acquisition, development, and construction phases of a project. Successful pre-leasing and pre-selling efforts are evidence of a project ’ s viability, and funds received from buyers are often used to finance a project ’ s development. Commissions; legal fees; closing costs; advertising costs; and costs for grand openings are examples of costs to sell or rent; however, based on the type of real estate property, leasing and sales activities — and related costs incurred — may vary.



Costs Incurred To Sell Of A Real Estate Project

Costs incurred to sell a real estate project are generally substantial. Depending on the type of selling costs incurred, they are accounted for in one of three ways:

  1. Included in project costs
  2. Deferred
  3. Expensed


What selling cost to be included in a project? which selling cost should be deffered? what to be expensed?  read on…….


[1]. Selling Costs To Be Included In Project Costs

Selling costs are included in project costs if all of the following criteria are met:

  1. They are reasonably expected to be recovered from the sale of the project or from incidental operations.
  2. They are incurred for tangible assets that are used directly throughout the selling period to aid in the sale of the project, or services that have been performed to obtain regulatory approval of sales.


Examples of costs that generally qualify as project costs are:

  1. Costs of model units and their furnishings
  2. Costs of sales facilities
  3. Legal fees for the preparation of prospectuses
  4. Costs of semi-permanent signs


[2]. Selling Costs To Be Deferred

FASB Statement No. 67 provides for the deferral of certain selling costs. It is important to note that deferred selling costs are not part of project costs. If the percentage-of-completion method were applied, the incurrence of selling costs would not increase a project’s percentage of completion. Additionally, deferred selling costs are not part of qualifying expenditures for interest capitalization.

Selling costs are accounted for as prepaid costs; that is, they are deferred if they meet the following criteria: They must be directly associated with successful sales efforts, and their recovery must be reasonably expected from sales. FASB Statement No. 67 provides for the deferral of such selling costs until the related profit is recognized.

If profit is recorded under the accrual method of accounting, a deferral of selling costs is generally not necessary, as the selling costs are incurred in the period of sale. For example: a seller may incur brokerage commissions at the time of closing.

If profit from a real estate sale is recognized under a method of accounting other than the accrual method, such as the deposit or installment method. Paragraph 18 of Statement 67 provides for cost deferral until the related profit is recognized.

If a sales contract is canceled or if the receivable from a real estate sale is written off as uncollectible, any related unrecoverable deferred selling costs are charged to expense.


[3]. Selling Costs To Be Expensed

Costs that do not meet the criteria for capitalization as project costs or for cost deferral are expensed as incurred.


Costs Incurred To Rent A Real Estate Project

Costs to rent a real estate project under operating leases fall in one of two categories:

  1. Initial direct costs; and
  2. Other than initial direct costs.
  3. Costs to rent projects under direct financing or sales – type leases are treated like costs to sell.


FASB Statement No. 67 does not apply to initial direct costs. Initial direct costs are incremental direct costs incurred by the lessor in negotiating and consummating leasing transactions, and certain costs directly related to specified activities performed by the lessor. The accounting for such costs is provided in FASB Statement No. 13, Accounting for Leases.

Costs other than initial direct costs to rent real estate projects under operating leases that are related to and are expected to be recovered from future rental operations are deferred (capitalized). Examples of such costs are costs of:

  1. Model units and their furnishings
  2. Rental facilities
  3. Semi-permanent signs
  4. Grand openings
  5. Unused rental brochures


Deferred rental costs that are directly related to a specific operating lease are amortized over the lease term. Deferred rental costs not directly related to revenue from a specifi c operating lease are amortized over the period of expected benefit. The amortization period of capitalized rental costs begins when the project is substantially complete and held available for occupancy. Any amounts of unamortized capitalized rental costs associated with a lease or group of leases that are estimated not to be recoverable are charged to expense when it becomes probable that the lease or group of leases will be terminated.


The Advertising Cost

Costs of advertising, which include the costs of producing advertisements (such as the costs of idea development, artwork, printing, and audio and video production) and communicating advertisements that have been produced (such as the costs of magazine space, television airtime, billboard space, and distribution costs) are accounted for based on the provisions of SOP 93 – 7, Reporting on Advertising Costs.

Costs of advertising are expensed, either as incurred or the first time the advertising takes place (e.g., the first public showing of a television commercial or the first appearance of a magazine advertisement) with the following two exceptions provided for in paragraphs 26 and 27 of that SOP:

Direct-response advertising whose primary purpose is to elicit sales to customers who could be shown to have responded specifically to the advertising and that results in probable future economic benefits. Costs of direct response advertising that are capitalized should be amortized over the period during which the future benefits are expected to be received.

Expenditures for advertising costs that are made subsequent to recognizing revenues related to those costs. For example: a company may assume an obligation to reimburse its customers for some or all of the customers’ advertising costs (cooperative advertising). In that scenario, revenues related to the transactions creating those obligations are earned and recognized before the expenditures are made.

For purposes of applying SOP 93-7, those obligations should be accrued and the advertising costs should be expensed when the related revenues are recognized.


Example – Selling Cost

Developer X sells developed lots. The buyers of the lots have made only nominal down payments, and X has determined that the application of the deposit method of accounting is appropriate. X intends to defer the following five types of costs incurred in connection with X’s efforts to sell the lots:

1. Wages and commissions paid to sales personnel, and related insurance, taxes, and benefits for sales personnel

2. Costs for the corporate sales department

3. Radio and newspaper advertising expenses

4. Telephone, hospitality, meals, and travel costs for customers and prospective customers

5. Title insurance and professional fees incurred in the sale

X intends to defer these costs, as they are incurred in connection with D’s efforts to sell the lots. The question is: “Is a deferral of these costs appropriate?” Here is the answer set:

  1. To the extent the costs for wages and commissions to sales personnel relate directly to successful sales efforts, their deferral (together with the deferral of any related insurance, taxes and benefits) is appropriate.
  2. Costs of the corporate sales department are not directly associated with successful sales and should not be deferred.
  3. For advertising costs, the guidance in SOP 93-7 should be followed.
  4. To the extent that telephone, hospitality, meals, and travel costs for customers and prospective customers are incurred directly for successful sales efforts, their deferral is appropriate.
  5. Title insurance and professional fees are incurred directly in connection with the sales; their deferral is appropriate.


The AICPA has issued SOP 04-2, Accounting for Real Estate Time-Sharing Transactions, which includes guidance relating to the deferral of costs for the sale of time-sharing intervals. That guidance may provide additional insights when considering what types of selling costs to defer.

Click to comment

Leave a Reply

Your email address will not be published. Required fields are marked *

Are you looking for easy accounting tutorial? Established since 2007, hosts more than 1300 articles (still growing), and has helped millions accounting student, teacher, junior accountants and small business owners, worldwide.


Related pages

distinguish between accounting concepts and conventionsleasehold improvements depreciation gaapgross profit method formulamanufacturing accounting journal entriescalculate closing inventoryincome statement horizontal analysisdrawbacks of outsourcingcash disbursements budgetcapitalizing softwaredepreciation cost per milehorizontal analysis is a technique for evaluating financial statement datacosts in excess of billingscompleted contract method exampledirect labor cost variance formulahow to calculate depreciation expenseias18why is prepaid rent considered an asset account4gl toolssample letter of acknowledgement receipt of paymentbep break even pointlease inducement accountingprepaid expenses balance sheetleasing iasaccounting closing entrieshow to calculate capitalized costis goodwill deductible for tax purposesjournal entry for perpetual inventory systemjournal entry of accrued interestexamples of embezzlementbudgeted gross marginfixed asset turnover ratiocapitalized interest exampletie ratio formulaextended warranty revenue recognitionwhat is treasury stock classified asdeffered tax calculationhow is roce calculatedcalculate pension expensebillings in excess of costs journal entryrevenue accrual journal entrycapital lease journal entries lesseebaumol and miller orr cash management modelshow to record adjusting entriessignificant influence equity methodeoq graphwhy do companies make adjusting entriesprepaid expense meaningwip calculation formulacar value depreciation calculator indiadifference between profit maximization and wealth maximization pdfcheck my cpa exam scorerent receivable journal entrycaat toolsexamples of taxable incomepayment reminder letter templatepersonal loan interest deductionhow to calculate goodwill in partnershiptypes of budgeting in management accountingdefine receivables turnoveramortization of intangible assets ifrsrevenue recognition under aspeis purchasing equipment an investing activityaud cpa exammarketable securities balance sheetis unearned revenue on the income statementdeferred income double entrywhat does notice date mean on irs letterdharma matchwhat are audit techniquesaicpa test questions