Any land or building held by an entity for any of the following purposes is known as investment property:
- to earn rental income;
- for capital appreciation; OR
- for capital appreciation as well as to earn rental income.
It must be noted that not all properties are included in investment properties, even if their purpose matches with the above criteria. Investment property is specifically concerned with land and buildings held to earn rental income or capital appreciation or both.
Difference with other categories of land and building
It is the intention of an entity or purpose of land or building that defines in which category that property falls, and accordingly its accounting is done as well. For instance, any land or building held by an entity for its own use, for e.g. used as a production facility or for administrative purposes (owner occupied property) will be classified as property, plant and equipment. Similarly, if an entity’s business is to purchase and sale land and buildings and the property is held in the ordinary course of business, it will be classified as inventory. So, it is important to understand the transactions and circumstances of the business, and then do the accounting accordingly.
Examples of investment properties
- Land held for capital appreciation
- Spare building rented out
- A building that is vacant but is held for renting out
- A building being constructed with the view to earn economic benefits either through capital appreciation or through rentals.
Partly occupied buildings
If a company has a building with 8 floors, out of which it has its office on the ground floor and first floor, whereas the rest are rented out to other companies to earn rental income. How should this building be accounted for? Will it be classified as investment property or property, plant and equipment?
Such partly occupied buildings are accounted for in the same way in which they are used. That part of the building (2/8th part) which is occupied by the company itself will be classified as property, plant and equipment, whereas the remaining value of the building (6/8th part) will be classified as investment property.