A building purchase journal entry debits Land and Building for their allocated shares of the total capitalizable cost and credits Cash and any mortgage used to fund the purchase. The entry is recorded on the closing date, and the total you capitalize is the purchase price plus certain settlement costs, not just the contract price. Because land does not depreciate and the building does, the split between those two debit lines sets your depreciation deductions for the next 39 years.
The Entry at Closing
Take a purchase where the total capitalizable cost works out to $1,550,000, split $465,000 to land and $1,085,000 to the building. The buyer pays $350,000 in cash at closing and finances the remaining $1,200,000 with a mortgage. The entry looks like this:
- Debit Land $465,000
- Debit Building $1,085,000
- Credit Cash $350,000
- Credit Mortgage Payable $1,200,000
Debits of $1,550,000 equal credits of $1,550,000. Whether the liability line is labeled Mortgage Payable or Notes Payable depends on the form of the debt instrument. The closing date you use here also fixes when depreciation starts under the mid-month convention described below.
The two numbers that take work are the total capitalizable cost and the split between land and building. Both are covered next.
What Belongs in the Total You Capitalize
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 the starting point. Certain settlement costs are added to basis; others are not.
IRS Publication 551 lists the settlement costs that get added to the asset’s basis:1Internal Revenue Service. Publication 551 (12/2025), Basis of Assets
- Legal fees, including 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 the buyer agrees to pay, such as back taxes, sales commissions, or charges for repairs
Publication 551 offers a useful test: if the cost would still exist had you paid all cash with no financing, it belongs in basis.1Internal Revenue Service. Publication 551 (12/2025), Basis of Assets A structural engineering inspection required to close, for instance, is capitalizable because you would have paid it regardless of how the deal was financed.
Costs That Stay Out
Financing-related costs do not increase the building’s basis. This is where first-time entries go wrong. Publication 551 specifically excludes the following from basis:1Internal Revenue Service. Publication 551 (12/2025), Basis of Assets
- 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 says settlement costs do not include amounts placed in escrow for future payment of taxes and insurance.1Internal Revenue Service. Publication 551 (12/2025), Basis of Assets Those sit in a separate prepaid asset account.
Splitting the Total Between Land and Building
Only the building depreciates. The IRS is explicit: “You cannot depreciate the cost of land because land does not wear out, become obsolete, or get used up.”2Internal Revenue Service. Publication 946 (2025), How To Depreciate Property Every dollar misallocated to land is a dollar you can never depreciate. Every dollar wrongly assigned to the building inflates deductions beyond what the IRS allows.
The standard method uses relative fair market values. Publication 551 instructs 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 whole property.1Internal Revenue Service. Publication 551 (12/2025), Basis of Assets A professional appraisal is the best source.
Say the land is appraised at $300,000 and the building at $700,000, for a total fair market value of $1,000,000. The land ratio is 30% and the building ratio is 70%. Applied to a $1,550,000 total capitalizable cost, the land account gets $465,000 and the building account gets $1,085,000. Those are the two debit amounts in the entry above.
If a professional appraisal is not available, Publication 551 allows you to allocate basis using assessed values from the local property tax assessor.1Internal Revenue Service. Publication 551 (12/2025), Basis of Assets Assessment ratios are less precise than appraisals but are an accepted fallback. Document the method either way and keep the supporting paperwork. The allocation is one of the first things the IRS examines on audit.
Separate Entries That Ride Alongside the Purchase
Loan Origination Fees
Points and origination fees relate to obtaining financing rather than acquiring the property, so they are recorded as a deferred asset and amortized over the life of the loan.1Internal Revenue Service. Publication 551 (12/2025), Basis of Assets A $12,000 origination fee on a 30-year mortgage is booked by debiting Deferred Financing Costs for $12,000 and crediting Cash for $12,000. Each month, debit Interest Expense and credit Deferred Financing Costs for roughly $33 ($12,000 divided by 360 months).
Escrow Deposits
Most commercial lenders require an initial escrow deposit at closing to cover future property tax and insurance payments. Record the deposit by debiting an Escrow Deposits account and crediting Cash. As the lender draws from escrow to pay taxes and insurance, reclassify those amounts to Property Tax Expense or Insurance Expense.
The Depreciation Entry That Follows
Once the building is on the books, you start depreciating it. The land account 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.2Internal Revenue Service. Publication 946 (2025), How To Depreciate Property Salvage value is treated as zero by statute, so you depreciate the full allocated building cost.3Office of the Law Revision Counsel. 26 USC 168 – Accelerated Cost Recovery System Annual straight-line depreciation equals 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.2Internal Revenue Service. Publication 946 (2025), How To Depreciate Property First-year depreciation equals the full-year amount times a fraction: the number of full remaining months plus one-half, divided by 12.
Publication 946 illustrates the convention 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, it gets 11.5 months, so the first-year deduction is $2,456 ($2,564 × 11.5 ÷ 12).2Internal Revenue Service. Publication 946 (2025), How To Depreciate Property
Apply the same math 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). The mid-month convention gives 6.5 months (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 record depreciation monthly, divide the applicable annual amount by 12 and post:
- Debit Depreciation Expense
- Credit Accumulated Depreciation—Building
Depreciation Expense reduces net income on the income statement. Accumulated Depreciation is a contra-asset that reduces the building’s book value on the balance sheet without changing the original cost sitting in the Building account. After the first partial year, each full year carries the same depreciation amount until the final year of the recovery period, when you deduct whatever unrecovered basis remains.