Individuals who purchase real estate should maintain a binder to organize their important papers and documents.
Paper or Electronic Files?
There is no doubt that paper files can be very voluminous and require much storage space. However, unless proper precautions are taken, electronic files can be lost because how the file was cataloged on the cloud has been forgotten or contaminated. Rather than deciding between paper or electronic files, consider maintaining both. Electronic files are great when you need to send them to a lender when refinancing or to your tax professional come tax time. If you cannot find your electronic files, you have the paper files as your backup.
When storing documents, think of security. Paper documents can be stored in a bank safety deposit box or in a fire-proof safe in your home. Electronic files can easily be copied, therefore consider making multiple copies. You don’t want your hard drive to crash and lose your files. Flash drives and portable storage discs are great backup options, as are online backup and cloud services.
Purchasing a Property
If you are working with a realtor, ask them for a listing of important documents that you need to maintain as a homeowner. Other good sources are your real estate attorney and your tax professional. Along with your realtor agent’s contract, think loan application and the supporting documents you provide to the lender, real estate appraiser, closing documents executed at settlement, loans, mortgages, deeds of trust, title insurance, home inspection report, etc.
File Form 8822 with the IRS to inform the IRS of your change of address and be sure to notify your insurance company of your new acquisition to ensure it is properly and fully insured.
If you use a tax professional, you will be asked to provide, at a minimum, the settlement HUD sheet, especially if you are purchasing the property for investment or rental purposes.
You will want to keep receipts for capital improvements made to your property; examples include kitchen or bath remodels, new roof, and major built-in appliances purchased. You don’t need to maintain regular maintenance or repair receipts. Your tax professional will ask for a summary of these capital improvement receipts when you sell your property and the IRS could demand to see the receipts if you are selected for an audit examination.
You may also want to keep copies of all renovation permits you requested to avoid legal problems with your buyer. If your contract of sale states that all permits were obtained for renovations to your home, and you failed to obtain those permits, your buyer, if held liable retroactively for non-permitted work that was found during a later home inspection or when the county visits the home to reassess its value, may seek damages against you. This is just one example as to why an experienced real estate attorney should be used when purchasing and selling real estate.
Selling the Property
The listing real estate agent may request a copy of the documents when you purchased the home. Along with your selling realtor agent’s contract, you will definitely want to maintain proof of any loans, mortgages and deeds in your name that have been paid off. If these debt instruments were recorded in the state or county records where you live, be sure that those records have been updated. Likewise, check your credit reports to make sure that they reflect that you satisfied you debt obligation on the sold property.
For tax reporting purposes, you will likely receive IRS Form 1099-S that will reflect the gross proceeds from the sale. These sales proceeds will be reported to the IRS so that it can match that information return against the income reported on Form 1040.
If you have purchased home warranties for major appliances that will remain with the home after the home (think built-in appliances, HVAC systems, whole house generators), and those warranties are assignable, the purchaser of your property will be pleased to know that those appliances have been insured.
File Form 8822 with the IRS to inform the IRS of your change of address and again notify your insurance agent of the home sale. A change of address may also affect your vehicle insurance.
When selling a personal residence, or an investment or rental property, you may have income taxes to pay. Tax liabilities can become more complicated when a personal residence is converted to a rental property, or vice-versa, or the property is unoccupied as your principal residence. Thus, it is most important to keep track of the dates such properties were used as a personal residence to take advantage of the two out of the most recent five years special tax exclusion on the sale of a personal residence.
An experienced tax professional will ask to see your HUD settlement sheets when you purchased and sold the property and a listing of your capital improvements to compute whether taxes are due. For tax purposes, the cost (basis) of your home is the sum of your original purchase price plus the cost of capital improvements you made. The difference between the sales price and the basis in your home is what the potential gain (or loss) on the sale of your home which would determine if the transaction is taxable.
Tax Tip #1
Many tax professionals recommend that taxpayers maintain their tax records for seven years. The IRS has three years to audit a return if it suspects any good-faith errors on your part, and six years if it thinks you under-reported your income by at least 25%. (Note: You can be audited at any point if the IRS suspects fraud.)
Tax Tip #2
With respect to maintaining receipts and other documents, keep in mind that some paper documents, particularly those printed on thermal paper, fade over time. Making an electronic copy of these receipts would be the best option.
If you would like to discuss your business or personal tax planning, tax preparation and other financial concerns with an experienced tax professional, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.
Copyright © 2022 Keystone Financial Solutions, Inc. All rights reserved.
BE SURE TO READ THE DISCLAIMER PAGE: Tax laws, IRS rules and regulations change frequently. Although we hope you’ll find this information helpful, this blog is for educational purposes only and should not be considered as the rendering of tax, legal or investment advice. The publisher shall not assume liability for any losses, injuries, or damages from the display or use of this information.
About F. Bryan Haarlander, EA, CTRS:
Bryan Haarlander is an IRS licensed Enrolled Agent and who owns and operates a specialized tax services firm serving clients in the western suburbs of Philadelphia, PA, which includes the cities of Chester Springs, Coatesville, Collegeville, Devon, Downingtown, Exton, Frazer, King of Prussia, Paoli, Philadelphia, Phoenixville, Pottstown, Radnor, Reading, Wayne, West Chester in Berks, Chester, Delaware, Montgomery and Philadelphia Counties, as well as clients in Delaware, New Jersey, New York and throughout the continental USA.
A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.