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Keeping full and accurate homeowner records is vital for determining not only your home deductions, but also the basis or adjusted basis of the home. These records include your purchase contract and settlement papers, if your bought the property, or other objective evidence if you acquired it by gift, inheritance, or similar means.
You should also keep any receipts, cancelled checks and similar evidence for improvements or other additions to the basis. Some examples are:
putting an addition on your home
replacing the entire roof
paving the driveway or replacing the concrete
installing central air-conditioning
rewiring your home
assessments for local improvements
amounts spent to restore damaged property.
In addition, you should keep track of any decreases to the basis. Some examples are:
insurance or other reimbursement for casualty losses
deductible casualty loss not covered by insurance
payment received for easement or right-of-way granted
value of subsidy for energy conservation measure excluded from income
depreciation deduction if home is used for business or rental purposes
How you keep records is up to you, but they must be clear and accurate and must be available to the IRS if requested. Any you must keep these records for a long, as they are important for the federal tax law.
Keep records that support an item of income or a deduction appearing on a return until the period of limitations for the return runs out. (A period of limitation is the limited period of time after which no legal action can be bought.) For assessment of tax, this is generally three years from the date you filed the return. For filing a claim for credit or refund, this is generally three years from the date you filed the original return or two years from the date you paid the tax, whichever is later. Returns filed before the due date are treated as filed on the due date.
You may need to keep records relating to the basis of property (discussed earlier) longer than the period of limitations.
Technically, basis is needed to determine gain on home sale (loss is not deductible). That need has diminished for most homeowners now that gain up to $250,000 ($500,000 sales by married couples) is tax exempt. Basis is still important, however, in figuring casualty loss, on conversion of the home to business use, or where there’s a gift of the home (in this case, important to the donee).
Keep those records as long as they are important in figuring the basis of the property. Generally, this means for a long as you own the property and, after you dispose of it, for the period of limitation.
If you have any questions as to what items are to be considered in determining basis, please call Bill.
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