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Realty News – How Long Should Homeowners Keep Their Records?


Homeowners often ask, “How long should I keep my records?” As accurate as some homeowners may be, they also are taxpayers concerned with the length of time to keep their records. Unfortunately, the Internal Revenue Service (IRS) provides only marginal help on this issue.

Rule of Thumb Issues

While homeowners ideally should have specific IRS guidelines to follow or regulations, they do not exist. The only rule of thumb help offered by the IRS is that homeowners should keep records “. . . for as long as they are important for any federal tax law.”

Although the IRS has a three-year statute of limitations to assess taxes and penalties, should they examine your returns and, after adding taxes and/or penalties that remain unpaid, this limitation clock does not start until two years from the date you actually paid the tax.

Confused? Naturally. Some careful homeowners choose to retain these records forever. While annoying, this is a good plan. Real estate records differ from most other recordkeeping issues, as buying or selling real property involves long-term issues, even for those engaged in fast “house flipping.”

Primary residence homeowners can exempt the first $250,000 ($500,000 for joint return filers) of profit on sale from taxation. However, homeowners must keep accurate records of improvements to justify this significant exemption, particularly when profits approach the maximum exempt amount. Therefore, accurate homeowner records still are necessary. Be aware that local or state real estate tax laws may differ from the federal regulations, creating additional tax liability.

It is insufficient simply to tell the IRS that you made improvements of $X. You need evidence of all improvements made in excess of the documented purchase price. Decreasing home values caused by the recent recession, play little or no role in these IRS regulations, as the tax base of your home is the original purchase price plus any improvements (not repairs) you’ve have made.

Realty Times recommends that homeowners keep permanent records of settlement, improvement, property tax, and other costs beyond the statute of limitations–ideally, forever. Whether you keep hard copy or electronic records of evidence is your choice. In all cases, your ability to access this information is important if the IRS asks you to verify its existence.

Should you consider selling your residence or investment real property, homeowners often want to access this data anyway. Reasons for establishing your true cost-basis go beyond IRS considerations, but are relevant to your capital gain tax exemption. Selling investment property also mandates keeping meticulous records, as establishing an accurate cost basis, particularly if higher than purchase price, saves tax dollars.

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