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Tricky Transactions--Best Month to Buy a Building
By Raul Rivera
December is the Best Month For the Church to Close on Building
It often surprises many churches that closing on a building purchase in December can result in significant cost savings compared to January or any other month. As you will see in the example below, the savings can be in the many thousands of dollars. The key factor influencing this difference is the proration of property taxes. Let's delve into a real-world example to illustrate this point.
The Case of Church XYZ
Church XYZ, searching for a new building, found a former restaurant at 123 Main Street. In October, they submitted an offer of $1.8 million with an earnest money deposit of $18,000.00. The seller accepted the offer. After thorough due diligence and securing eighty-five percent financing of $1,530,000.00, the closing attorney presented two possible closing dates to the church's finance director: December 28th or January 7th. Considering the busy holiday season, the finance director chose the January 7th date. Unbeknownst to him, this decision would cost the church $27,692.31 instead of just $460.26 had he chosen December 28th.
How Could One Simple Decision Cost So Much?
Timing in Real estate is precisely what makes this scenario a "tricky transaction." Navigating the real estate market presents a labyrinth of potential missteps for churches. It's a common advice I give to pastors and church leaders: steering a church also means helming a corporation as its CEO. The most effective leaders understand the importance of incorporating the insights of adept business minds into the Church's direction. Unfortunately, it's a recurring issue where skilled businessmen find themselves sidelined in the "kingly realm of the Church," not due to a lack of willingness from pastors to involve them but because of a hesitation born from uncertainty. Pastors often wish to open avenues for business-savvy congregants; it’s just that they struggle with crafting a meaningful and relevant role that truly resonates with the acumen of these professionals.
Understanding Property Tax Proration
When a church decides to purchase a building, often an overlooked detail is the proration of property taxes between the seller and the buyer. Proration is a way to divide property taxes fairly based on how long each party has owned the property during the year of the transaction.
Here’s how it unfolds: The total annual property tax bill is divided by 365 days to determine a daily tax rate. This daily rate is crucial because it helps to allocate the tax responsibility accurately between the seller and the buyer, relative to the exact number of days each will own the property during that year.
Scenario 1: Closing on December 28
- Annual Property Taxes: $27,999.15
- Tax Year: January 1st to December 31st
- Daily Tax Rate: 27,999.15 divided by 365 = 76.71
- Seller's Ownership Duration: January 1st to December 27th (361 days)
- Buyer's (Church) Ownership Duration: December 28 to December 31 (4 days)
- Proration Calculation:
- Seller’s Prorated Tax: Daily Tax Rate × 361 is $76.71 times 361 =27,692.31
- Buyer’s (Church) Prorated Tax: Daily Tax Rate × 4 is 76.71 times 4 =306.84
Scenario 2: Closing on January 7th
- Annual Property Taxes: $27,999.15
- Tax Year: January 1st to December 31st
- Daily Tax Rate: $27,999.15 divided by 365 days = $76.71
- Seller's Ownership Duration: January. 1st to January 6th (6 days)
- Buyer's (Church) Ownership Duration: January 7th to December 31st (359 days)
- Proration Calculation:
- Seller’s Prorated Tax: $76.71 times 6 = $460.26
- Buyer’s (Church) Prorated Tax: $76.71 times 359= $27,538.89
How to Record the Purchase in Church Books
Properly recording this is tricky. This is where our bookkeeping service has come in handy for the churches that trust StartCHURCH for their financial stewardship. Our unique, team-oriented approach to managing your church's books is akin to having a behind-the-scenes financial secretary vigilantly overseeing your church’s finances. Serving and affirming the call of God in your life is our mission. I can confidently say that our bookkeeping team is readily accessible, ensuring you won’t have to leave messages and wait for days to get an answer.
The church started with a total of $412,000 cash on hand before the transaction began.
In October
Debit: Prepaid Expenses (Asset) $18,000.00
Credit: Cash $18,000.00
In January
Reverse the October Transaction
Credit: Prepaid Expenses (Asset) $18,000.00
Debit: Cash $18,000.00
Then enter the following:
Debit: Building (Asset) $1,800,000.00
Debit: Closing Costs (Expense) $12,653.00*
Debit: Taxes (Expense) $27,538.89
Credit: Mortgage Payable $1,530,000.00
Credit: Cash $310,191.89**
The final cash on hand after closing on January 7th is $101,808.11. If they had closed on December 28th, the final cash on hand would be $129,040.16.
In the memo of the Taxes entry, the Financial Director enters, “Oops, I messed up.”
Tricky Transactions are Many
As leaders in ministry, we are called to navigate our churches' spiritual and temporal stewardship with diligence and wisdom. The case of Church XYZ shows us how the realm of church finances is fraught with complexities where the simple timing of transactions can have profound implications on the church’s financial bottom line.
Our commitment to serving churches goes beyond mere bookkeeping. At StartCHURCH, we offer assurance that your financial concerns are also ours. Our goal is to empower you with financial clarity and the confidence to make informed decisions that align with your church's vision. Schedule a call today, and let us guide you on your journey!
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*All closing costs are lumped into one account
**Down payment including earnest money + closing costs + taxes