Unless you have unlimited storage in your home or office, you may find yourself wondering if you really need to keep all of your paperwork and, if so, for how long. There is no one-size-fits-all answer. The length of time depends on the type of document and the related expenses or events. Before you turn on the shredder, here are some general guidelines regarding document retention related to real estate transactions.
The IRS states that you should keep tax returns and the supporting documents for at least three years after you file the return. Why? The statute of limitations (the amount of time the IRS has to audit you or the amount of time you can amend your return) is generally three years. However, the rules change from three years if you (1) keep supporting documents for six years if you underreported income by more than 25% of the gross income shown on your return; or (2) if no return is filed or there is fraud, the statute remains open indefinitely. Financial experts recommend that you keep your documents for a minimum of seven years after your return is filed.
Documents to retain as long as you or your spouse owns the property
Documents to retain until your warranty or policy expires
Documents to retain indefinitely
Documents to retain until statute of limitations expires (generally three years after the due date of the return)
Documents to retain as long as you own the property
Documents to retain until your policy or agreement expires
Documents to retain indefinitely
Documents to retain as long as you or your spouse owns the property
Documents to retain until updated
The guidance above follows IRS guidelines. When determining how long to retain your documents, don’t forget to research your state’s tax record retention requirements. There are some states where the statute of limitations is longer than the IRS’s.
When it comes to archiving documents, consider how you will safely and securely store them. Documents can be stored traditionally via paper, digitally or a combination.
Storing documents in paper form may seem redundant in today’s digital world, but there are reasons to consider this option. A paper copy is a good back-up in case of a data loss. Documents should be stored in a locked fireproof cabinet or safe deposit box.
You may also scan and store your documents digitally. Many companies offer cloud-based storage where you can easily access all of your files. After uploading your documents, shred any unneeded paper copies.
Be sure all relevant parties are aware of where the documents are stored and how to access them. And always consult with your accountant and/or attorney when creating a record retention policy. Legal requirements may differ in certain circumstances and should be considered when creating a policy.
