A Record Retention Guide for Real Estate Transactions

How Long Should You Keep Real Estate Transaction Documents? 

Unless you have unlimited storage in your home or office, you may wonder if you really need to keep all your paperwork and, if so, for how long. There is no one-size-fits-all answer. The timeline to retain all the paperwork depends on the document type and the related expenses or events. Before you turn on the shredder, here are some general record retention guidelines regarding real estate documents. 

Why Record Retention is Crucial for Real Estate Transactions 

Record retention in real estate transactions is crucial for legal compliance, tax purposes, and dispute resolution. It helps you maintain the necessary documentation to meet regulatory requirements, accurately report financials, and provide evidence in case of legal issues. Additionally, it supports tracking the property’s financial performance and history. Systematic records management makes accessing important legal documents easy when needed. 

The IRS Rule of Thumb for Document Retention 

The IRS states that you should keep tax returns and supporting documents for at least three years after you file your original  return or two years from the date you paid the tax, whichever is later if you file a claim for credit or refund after you file your return. This general rule is because 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 in the following situations: 

1. You underreported income by more than 25% of the gross income shown on your return, in which case you should keep documents for six years or  
2. You filed no return or a fraudulent return, in which case the statute of limitations remains open, and you should keep records indefinitely or 
3. You have an employment relationship, in which case you should keep records for at least 4 years after the later of the date the tax becomes due or is paid or  
4. You file a claim for a loss from worthless securities or bad debt deduction, in which case you should keep records for 7 years.  

Generally, financial experts recommend keeping your documents for at least seven years after filing your return.  

Four Documents Homeowners Should Retain 

Knowing which documents must be retained and how long is essential for homeowners. Proper records management can help you manage your property efficiently and simplify future transactions. 

Homeowners should retain the following documents as long as they or their spouse own the property: 

• Property deeds 
• Condo association covenants, codes, and restrictions 
• Capital improvement receipts and invoices 
• Home inspection reports 

Short-Term Documents  

• Homeowners should retain the following documents until their warranties or policies expire: 
• Service contracts and home warranties 
• Homeowners insurance policies 
• Home repair receipts 

Long-Term Documents 

Homeowners should retain the following documents indefinitely: 

• Records of paid mortgages (certificate of satisfaction or lien release) 
• Closing disclosure statements (settlement statement or HUD-1 settlement sheet) 
• List of household possessions, including photographs of valuables that are the subject of or would be covered by an insurance policy 

Documents to retain until the statute of limitations expires (generally three years after the due date of the return, subject to the exceptions described above) 

• Tax returns 
• Closing disclosure statements 
• Property tax payments (tax bills and the canceled checks) 
• Capital improvement receipts and invoices 
• Form 1098 Mortgage Interest Statements 
• Form 1099-S Proceeds from Real Estate Transactions 
• Proof that your home was your primary residence for at least two of the prior five years (e.g., utility bills, voter registrations, prior tax returns) 
• Employment records for live-in help (e.g., Form W-2s, Form W-4s, pay and benefits statements);  records of employment taxes due or paid  

Document Retention for Investment Real Estate 

Keeping detailed records for your investment properties can be very helpful for both tax purposes and effective management. Maintaining a trail of proper paperwork makes tracking expenses and calculating depreciation easier and supports your tax filings. 

Retain the following documents for investment properties:  

• Property deeds 
• Appraisals or valuations used to determine depreciation 
• Capital improvement receipts and invoices 
• Receipts for repairs and maintenance 
• Insurance payment receipts 
• Detailed time records to show the amount of time and effort spent at investment properties, necessary to show held for investment and not a “hobby” or to support deductions for the real estate professional exception to the passive activity rules 

Documents you should retain until your policy or agreement expires 

• Insurance policies 
• Tenant lease agreements 

Documents you should consider retaining indefinitely 

• Partnership or LLC agreements for real estate investments 
• Closing disclosure statements (i.e., settlement statement or HUD-1 settlement sheet) 

Other Key Real Estate Documents to Retain 

Knowing which records should be kept long-term is vital when managing real estate transactions. This will help you maintain the necessary legal, financial, and personal paper trail. 

Documents to retain as long as you or your spouse owns the property 

• Original owners' sales contracts and deeds for a home received as a gift 
• The fair market value for inherited properties on the date of the decedent’s death and any rules for heirs' use of home 
• Divorce decrees with home sale clause 

Documents to retain until updated 

• Wills and property trusts 

State-Specific Retention Rules 

The guidance above is modeled after IRS guidelines. When determining how long to keep property tax records, 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. You should also consider having a balanced record retention policy that facilitates compliance with a state’s laws and regulations.  

How to Store Documents Securely 

When archiving documents, consider how you will safely and securely store them. Documents can be stored traditionally on paper, digitally, or a combination. 

Paper vs. Digital Storage 

Storing documents on paper may seem redundant in today’s digital world, but there are reasons to consider this option. A paper copy is a good backup in case of 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 your files. After uploading your documents, shred any unneeded paper copies. 

Maintaining Accessibility of Important Records 

Maintaining records' accessibility is vital for efficient operations and compliance. A well-structured document record retention policy, combining paper and digital storage, can significantly enhance security and ease of access. This approach safeguards critical information and streamlines retrieval processes, simplifying managing and maintaining records. 

Consider informing all relevant parties where the documents are stored and how they could access them. Always consult with your accountant and/or attorney when creating a record retention policy. Legal requirements for real estate investments may differ in certain circumstances and should be considered when creating a policy. 

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