$120k to the General contractor → “Job Expenses: Construction Costs”
$18k loan interest → “Interest Expense”
$9k architect → “Professional Fees” $6k permits → “Licenses & Permits”
❌ALL UPFRONT EXPENSE ❌
How to correctly capitalize interest, soft costs, and construction costs in QBO — and why doing it wrong is silently killing your tax deferral and refinance ability (hint: depreciation is key). ✅It’s 100% fixable in under 15 minutes inside QBO ✅ Here’s exactly why you must switch to a Construction in Progress (CIP) workflow in QuickBooks Online, plus the dead-simple setup:
Why Expensing As You Go Is Costing You a Fortune
1. You’re voluntarily paying tax early (hundreds of thousands on big projects)
2. You’re destroying your debt service coverage ratio during construction
3. You’re shrinking the basis for bonus depreciation and cost segregation
4. You’re creating a nightmare when you eventually refinance or sell
5. You’re technically out of IRS compliance (IRC §263A)
The IRS says almost everything during the “production period” must be capitalized — not expensed.
The Correct QBO Way: One Balance Sheet Account Changes Everything
Step-by-step setup (takes 10–15 minutes once per company file):
1. Create the parent CIP account
Chart of Accounts → New → Asset → Other Assets → Construction in Progress
Name it: “1500 - Construction in Progress” (or “1550 - CIP - [Property Name]” if you track by class)
2. Create sub-accounts (optional but recommended)
• 1501 - CIP: Hard Costs
• 1502 - CIP: Capitalized Interest
• 1503 - CIP: Capitalized Property Taxes
3. Change your bills and expenses during construction
Instead of expensing to “Job Expenses” or “Repairs,” code EVERYTHING to the proper CIP sub-account.
Example:
Move general contractor bill from Expense TO 1501 - CIP: Hard Costs
Or:
Move Monthly loan interest from Expense TO 1502 - CIP: Capitalized Interest.
4. When the project is placed in service:
Journal Entry:
Debit: 1600 - Buildings
Debit: 1620 - Land Improvements
Credit: 1500 - Construction in Progress (entire balance)
5. Depreciate (at year-end or month-end):
Journal Entry:
Debit: Depreciation Expense (straight line or accelerated depreciation- ask your bookkeeper)
Credit: Accumulated Depreciation (Contra account below the Fixed Asset)
As the fixed asset depreciates, it will look like this:
Fixed asset acquisition: $100,000
Accumulated depreciation: ($10,000)
Net book value: $90,000
Bonus QBO Pro Tips
• Turn on Class Tracking and create a class for each project/property
• Use the CIP sub-account + Class to see exactly how much is invested in each deal in real time
• Create a saved report: Balance Sheet → filter to only CIP accounts → run monthly for investors
Final Thoughts
Need an exact Chart of Accounts for every CRE development in QBO? Comment below or contact directly and I’ll send mine to you for FREE.