Real estate taxes payable are taxes owed, but not yet paid out, by property owners to local governments or taxing authorities for the ownership of real estate properties. Real estate taxes payable is considered a liability on the balance sheet as this is money owed by the farmer or rancher to a government entity.
In This Section
What are Real Estate Taxes Payable?
Real estate taxes payable are taxes owed, but not yet paid out, by property owners to local governments or taxing authorities for the ownership of real estate properties. As such, these are considered a payable as the amount is due to another entity in the future.
These taxes are levied annually or semi-annually based on the assessed value of the property and are used to fund local government services and infrastructure, such as schools, roads, police, and fire departments.
Since real estate taxes payable are monies owed to another entity, in this case a government entity, these are considered liabilities on the balance sheet. Most often, these liabilities will be due within less than a year, and thus are considered a short-term or current liability.
While “payables” are an accrual based concept. This means that expenses are recognized when they are incurred, regardless of when the cash is actually paid.
Types & Examples of Real Estate Taxes Payable
Common examples of accounts payable on a farm balance sheet include:
- Property Taxes – Taxes levied by local governments or taxing authorities on the ownership of real estate properties, including residential homes, commercial buildings, vacant land, and investment properties.
- Land Taxes – Taxes assessed on the value of land owned by individuals or businesses, typically based on the assessed value of the land as determined by local tax assessors.
- Municipal Taxes: Taxes imposed by municipalities or city governments to fund local services and infrastructure, such as schools, roads, parks, libraries, police, and fire departments.
- County Taxes – Taxes imposed by county governments to fund county-wide services and operations, including public health, social services, courts, and jails.
- School District Taxes – Taxes levied by school districts to fund public education, including K-12 schools, school facilities, teachers’ salaries, and educational programs.
- Special Assessments – Additional taxes or assessments imposed on real estate properties for specific purposes, such as road improvements, sewer or water infrastructure projects, or neighborhood revitalization efforts.
- State Taxes – In some cases, states may impose property taxes on real estate properties in addition to local taxes. State property taxes may fund state-level services and programs, such as education, transportation, or public safety.
- Transfer Taxes – Taxes imposed on the transfer of real estate properties from one owner to another, typically based on the sale price or fair market value of the property. Transfer taxes may be levied by local, state, or federal governments.
These accounts payable represent the various types of obligations that a farm may have to external parties as part of its day-to-day operations. They are typically short-term liabilities that are expected to be paid within a relatively short period, usually within one year or less.
Real Estate Taxes Payable on the Balance Sheet
Real estate taxes represent an amount of money owed, but not yet paid out, to a government entity. These taxes payable have accrued and are generally expected to be paid out within the coming year. As such, Real Estate Taxes Payable are considered a Current Liability on the balance sheet.
Purpose of Real Estate Taxes Payable
Tracking real estate taxes payable on a balance sheet is important for several reasons:
Financial Planning and Budgeting
Real estate taxes payable represent a significant recurring expense for property owners. Tracking these liabilities allows property owners to accurately forecast their financial obligations, budget for upcoming tax payments, and manage cash flow effectively.
Compliance and Avoidance of Penalties
Property owners have a legal obligation to pay real estate taxes on time and in full. Tracking real estate taxes payable helps ensure compliance with tax laws and regulations, reducing the risk of late payments, penalties, interest charges, or legal consequences imposed by taxing authorities.
Financial Reporting and Transparency
Including real estate taxes payable on the balance sheet provides stakeholders, such as investors, lenders, creditors, and regulators, with a comprehensive view of the property owner’s financial position and obligations. This transparency enhances trust and confidence in the accuracy and completeness of financial reporting.
Property Valuation
Real estate taxes payable are directly related to the assessed value of the property. Tracking changes in real estate taxes payable over time may provide insights into changes in the property’s value, market conditions, or tax assessment practices, which can impact property valuation and investment decisions.
Tax Planning and Optimization
Tracking real estate taxes payable enables property owners to assess their overall tax burden, explore opportunities for tax planning and optimization, and take advantage of available tax deductions, exemptions, or incentives to minimize tax liabilities legally.
Risk Management
Real estate taxes payable represent a financial liability that can impact the property owner’s financial stability and cash flow. By tracking real estate taxes payable, property owners can identify potential risks, plan for contingencies, and implement strategies to mitigate the financial impact of tax obligations.
Overall, tracking real estate taxes payable on a balance sheet enhances financial management, compliance, transparency, and risk management for property owners, supporting informed decision-making and long-term financial sustainability.
How to Record Real Estate Taxes Payable on the Balance Sheet
Real estate taxes payable are monies owed to local governments and tax authorities related to the ownership of property. Understanding how farm real estate taxes are assessed ad valued is crucial in managing accurate records on the farm balance sheet. Here’s how real estate taxes are valued:
Assessment of Real Estate Taxes
Local governments assess the value of real estate properties within their jurisdiction periodically, typically based on market value or assessed value determined by a local assessor’s office. The assessed value serves as the basis for calculating property taxes.
Tax Rate Applied
Once the assessed value of the property is determined, local taxing authorities set a tax rate, also known as a millage rate, which is applied to the assessed value to calculate the property tax liability. The tax rate is expressed in terms of dollars per thousand dollars of assessed value.
Calculation of Real Estate Taxes
Property taxes payable are calculated by multiplying the assessed value of the property by the tax rate. For example, if a property has an assessed value of $200,000 and the tax rate is $10 per $1,000 of assessed value, the property tax liability would be $2,000 ($200,000 x $10/$1,000).
Billing and Payment
Property owners receive a tax bill from the local taxing authority, typically on an annual or semi-annual basis, indicating the amount of property taxes owed. Property taxes payable represent a liability for the property owner until they are paid. Payments are usually made directly to the local government or through an escrow account if the property owner has a mortgage.
Recording Real Estate Taxes on the Balance Sheet
Real estate taxes payable are recorded as a current liability on the balance sheet of the property owner until they are paid. Once the taxes are paid, the liability is reduced, and the corresponding amount is deducted from the cash or bank account.
Exclusions from Real Estate Taxes Payable on the Balance Sheet
Common exclusions from real estate taxes payable on a farm balance sheet typically include items that do not directly represent the current real estate tax liabilities owed by the farm.
In other words, if the tax liability is not directly related to the ownership of real estate property, the amount should go in a different account on the balance sheet.
These exclusions help ensure that the real estate taxes payable account accurately reflects the farm’s obligations. Here are some common exclusions:
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Deferred Tax Liabilities: These represent future tax obligations resulting from temporary differences between the tax basis of assets and liabilities and their reported amounts. They are recorded separately from current real estate taxes payable.
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Income Taxes: General income tax liabilities are not included under real estate taxes payable. Income taxes are categorized separately on the balance sheet.
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Other Property-Related Taxes: Taxes that are not specifically real estate taxes, such as personal property taxes on machinery and equipment or special assessments for improvements like sewer lines, are recorded separately.
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Utilities and Service Fees: Charges for utilities and municipal services, even if they are billed by local governments (like water or sewer fees), are not considered real estate taxes and are recorded separately as accounts payable or utility payable.
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Tax Liens and Delinquent Taxes: Outstanding tax liens or delinquent taxes from previous years may be recorded under a different category, such as accrued liabilities or long-term liabilities, depending on their nature and repayment terms.
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Insurance Premiums: Payments for property insurance are not included in real estate taxes payable. These are typically recorded as prepaid expenses or insurance expenses.
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Licenses and Permits: Fees paid for agricultural licenses, permits, and certifications are not real estate taxes and are recorded separately.
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Interest and Penalties: Interest and penalties for late payment of real estate taxes are generally recorded separately from the principal amount of real estate taxes payable, often under accrued expenses or interest payable.
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Tax Refunds Receivable: Any expected refunds for overpayment of real estate taxes are recorded as assets under tax refunds receivable, not as a reduction in real estate taxes payable.
By excluding these items, the real estate taxes payable account on the farm balance sheet accurately represents the current real estate tax obligations. This ensures clear and precise financial reporting, aiding in effective financial management and compliance with tax regulations.
Frequently Asked Questions
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