GAAP (Generally Accepted Accounting Principles) and tax-basis accounting produce different numbers for the same multifamily property. GAAP emphasizes accurate period reporting; tax basis emphasizes current tax optimization.
Key differences: depreciation methods (GAAP uses economic life; tax uses accelerated methods), bad debt treatment, timing of income recognition, and capitalization thresholds. Large properties with institutional owners often maintain both sets of books.
For LA multifamily sellers, tax-basis NOI (as reported on Schedule E) often differs from operating statement NOI (which may be closer to GAAP). Clean diligence requires reconciling these differences. Buyers primarily care about operating NOI for cap rate purposes.
From the Sterman LA Multifamily Glossary — defined the way a broker with $1.41 billion across 254 closed transactions actually uses these terms.
Michael Sterman, Senior Managing Director Investments, Marcus & Millichap.
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