How to Record a Building Purchase Journal Entry

A building purchase journal entry debits Land and Building for their allocated shares of the total capitalizable cost and credits Cash and any mortgage payable for how you funded the deal. The entry is recorded on the closing date, and the two debits must be separated because land does not depreciate while the building does. Everything else about the transaction, from settlement fees to escrow deposits to loan points, flows from that basic structure.

The Journal Entry, with a Worked Example

Assume you buy a commercial property for a total capitalizable cost of $1,550,000. An appraisal values the land at $300,000 and the building at $700,000, so 30% goes to land ($465,000) and 70% goes to the building ($1,085,000). You pay $350,000 in cash at closing and finance the remaining $1,200,000 with a mortgage.

On the closing date, you record:

Debit Land $465,000
Debit Building $1,085,000
Credit Cash $350,000
Credit Mortgage Payable $1,200,000

Debits total $1,550,000 and credits total $1,550,000, so the entry balances. If the debt instrument is a promissory note rather than a mortgage, label the liability Notes Payable instead. The closing date is not just a bookkeeping detail: it sets when depreciation begins under the mid-month convention.

What Belongs in the Capitalizable Total

Before you can post the entry, you have to know what “total capitalizable cost” actually includes. Under generally accepted accounting principles, an asset’s cost includes every expenditure necessary to bring it to the condition and location ready for its intended use. The purchase price is only the starting point.

IRS Publication 551 lists the settlement costs you add to basis:¹

Legal fees for title search, sales contract preparation, and deed preparation
The owner’s title insurance policy (not the lender’s)
Transfer taxes and recording fees
Surveys
Abstract of title fees
Utility connection charges
Seller obligations you agree to pay, such as back taxes, sales commissions, or repair charges

A useful test from Publication 551: if you would still owe the cost had you paid all cash with no financing, it belongs in basis.¹ A structural engineering inspection required to close the deal is capitalizable for that reason.

Costs That Stay Out

Financing costs do not increase the building’s basis. This is the mistake that trips up most first-time entries. Publication 551 specifically excludes:¹

Points and loan origination fees, which are amortized over the loan term as interest expense
Mortgage insurance premiums
Loan assumption fees
Credit report costs
Lender-required appraisal fees

Escrow deposits for future property taxes and insurance also stay out of basis. Publication 551 states that settlement costs do not include amounts placed in escrow for future payment of taxes and insurance.¹ Those deposits go into their own prepaid asset account.

Splitting the Total Between Land and Building

After adding up every capitalizable cost, you divide that total between two accounts. Land and Building live on separate lines because land does not depreciate. The IRS states this plainly: “You cannot depreciate the cost of land because land does not wear out, become obsolete, or get used up.”² Every dollar you misallocate to land is a dollar you can never depreciate. Every dollar you wrongly assign to the building overstates deductions.

The standard method uses relative fair market values. Publication 551 tells you to multiply the lump-sum basis by a fraction: the fair market value of each component over the total fair market value of the property.¹ A professional appraisal is the cleanest source for those values.

In the running example, the land appraises at $300,000 and the building at $700,000, for a $1,000,000 total. The ratios are 30% and 70%. Applied to a $1,550,000 capitalized cost, that produces $465,000 for Land and $1,085,000 for Building.

Without a professional appraisal, Publication 551 allows you to allocate using the assessed values from the local property tax assessor.¹ Assessments are rougher than appraisals but accepted. Either way, keep the paperwork. On audit, the IRS looks at this allocation early.

Separate Entries at Closing

Two items at closing don’t fit inside the main entry and need their own postings.

Loan Origination Fees

Points and origination fees relate to financing, not to acquiring the property, so they become a deferred asset amortized over the life of the loan.¹ On a 30-year mortgage with $12,000 in origination fees, you debit Deferred Financing Costs $12,000 and credit Cash $12,000 at closing. Each month you then debit Interest Expense and credit Deferred Financing Costs for roughly $33 ($12,000 ÷ 360).

Escrow Deposits

Most commercial lenders require an initial escrow deposit at closing to cover future property tax and insurance payments. Debit an Escrow Deposits account and credit Cash for the amount funded. As the lender later pays taxes and insurance from that account, you reclassify the amounts to Property Tax Expense or Insurance Expense.

Depreciating the Building After the Purchase

Once the building sits on your books, you begin depreciating it. Land is never touched. For federal tax purposes, nonresidential real property placed in service after 1986 uses the Modified Accelerated Cost Recovery System with a 39-year recovery period and the straight-line method.² Salvage value is treated as zero by statute, so you depreciate the full allocated cost.³ Annual straight-line depreciation is the building’s basis divided by 39.

The Mid-Month Convention

Real property uses the mid-month convention. Property placed in service during a month is treated as acquired at the midpoint of that month.² First-year depreciation equals the full-year amount times a fraction: the remaining full months plus one-half, over 12.

Publication 946 illustrates this with a $100,000 nonresidential building placed in service in January. Full-year depreciation is $2,564 ($100,000 ÷ 39). Treated as placed in service at mid-January, the building gets 11.5 months, and the first-year deduction is $2,456 ($2,564 × 11.5 ÷ 12).²

Applied to the $1,085,000 building in the running example, placed in service in June: full-year depreciation is $27,821 ($1,085,000 ÷ 39). Six and a half months apply (July through December plus half of June), so the first-year deduction is $15,070 ($27,821 × 6.5 ÷ 12).

The Recurring Entry

If you post depreciation monthly, divide the applicable annual amount by 12 and record:

Debit Depreciation Expense
Credit Accumulated Depreciation—Building

Accumulated Depreciation is a contra-asset. It reduces the building’s book value on the balance sheet without touching the original cost sitting in the Building account. Each full year after the first partial year carries the same amount, until the final year, when you deduct whatever unrecovered basis is left.

One boundary worth flagging: if you bought the property intending to demolish the existing structure, this whole allocation collapses. The IRS requires the entire purchase price and net demolition costs to be added to Land, with no deduction allowed for the demolished building.⁴ In that scenario the entry above changes shape entirely.

1
Internal Revenue Service. Publication 551 (12/2025), Basis of Assets
2
Internal Revenue Service. Publication 946 (2025), How To Depreciate Property
3
Office of the Law Revision Counsel. 26 USC 168 – Accelerated Cost Recovery System
4
eCFR. 26 CFR 1.165-3 – Demolition of Buildings