How to avoid massive headaches at tax time…and protect yourself!

January 22, 2012

This year it seems that people are getting jump on their tax preparation a bit earlier that usual. Currently, I’m fielding a variety of phone calls from our past clients asking basic questions like, “do you have a copy of our escrow paperwork, I need it for my taxes?” or other questions like, “how long do I need to keep all my real estate paperwork for tax purposes?”

Legally, I can’t answer these questions with the authority of a tax professional, and I am not purporting to give tax or legal advice in this blog post. I can however, remind my clients that you should ALWAYS keep your real estate records in hard copy AND digital copy. Notice I didn’t say “keep them for 3-6 years just in case.” I strongly believe documents like these are important enough to keep permanently.

There are several reasons for this:

1: Hard copies can be lost or destroyed and simply misplacing them does not shift the burdon of proof onto another party (whether that be the IRS or another party involved in the real estate transaction).

2: Electronic copies can exist in multiple places at the same time with little to no storage cost or risk of damage. Since real estate is a matter of public record it doesn’t make much sense worrying that someone might hack your gmail account and see your real estate documents.

I recommend the common naming convention of the files that include the tax year, the address of the property, and the tax id number. That way, if you want to search your hard-drive, email account, or anywhere else all you have to do is use these as “keywords” for your search.

Here’s an example: 2008_Taxes_2314EldoradoDrive_TaxNumber4928104.pdf

If you’re reading this article and thinking to yourself, “yeah but I heard they can only go back 6 years!” I strongly urge to you consider how little your storage of documents might cost and how massive a problem it could cause should you never be able to find your original documents.

Remember to keep all records, not just specific tax documents. You need to keep the receipts for the improvements that you made, claims made through insurance, etc. All of these things can come up in one way or another if you are audited, or, simply want to show the next buyer how much money you put into the house.

If you have questions on how to calculate principle gains on a primary residence, investment property, or would like to know how to best transition your next 1031 give me a call. I can be amazingly helpful, all I ask is that you try our service at Design Escrow. We have an incredible breadth of knowledge about handling escrows in the Arcadia area, and are one of the few truly independent 3rd party escrow companies.

Give me a call with questions, I’m here to help!

Kay Gass

P.S. I’m more helpful that any YouTube video, but in case you need to “google” a question before calling a real live person, here is the link to the IRS’s YouTube Channel.