Record Keeping – What and How Long?
How much interest was paid on the mortgage? Where are the receipts for our medical expenses? Taxpayers ask questions like these every year as the tax filing deadline approaches (April 17th this year).
In addition to making it easier to prepare your tax return, good record keeping will help you manage your §1031 exchange transactions. Proper records will help you support the items reported on your return, including the expenses incurred and how the basis was determined.
Record Storage - Whether you store records electronically or simply rely on your checkbook, keep your records in an orderly fashion and in a safe place. In Revenue Procedure 97-22 the IRS requires that an electronic storage system ensure an accurate and complete transfer of the hard copy records to an electronic storage media that will index, store, preserve, retrieve, and reproduce the electronically stored records. Once you are in compliance with these procedures you may then destroy the original records.
What to Keep - In Publication 552, the IRS sets forth the basic records that everyone should keep for proof of income and expenses. For items concerning your income you should keep: Form(s) W-2, 1099, 2439 and K-1, as well as bank, brokerage and mutual fund statements. With regard to expenses, keep: sales slips; invoices; receipts; canceled checks or other proof of payment; and written communications from qualified charities. For your home, keep: closing statements; purchase and sale invoices; proofs of payment; insurance records; and receipts for improvement costs.
How Long? - Once you determine what records to keep, the next question is: How long should you keep them? In general, you must keep the records until the statutory limitations period runs out for that return. The period of limitations is the time during which you can amend your return to claim a credit or refund or the IRS can assess additional tax. In most cases the limitation period is three years. There is no limit in the event you file a fraudulent return.
§1031 Exchanges - When you defer taxes through a §1031 exchange your basis in the property you receive is the same as the basis of the property you gave up, subject to some adjustments. You must keep the records on both the old and the new property until the period of limitations expires for the year in which you dispose of the new property in a taxable disposition.
Non-Tax Purposes – Think twice before disposing of your records. Even though you may not need them for tax purposes, you may need them for other reasons, such as insurance or medical care.
Reference: IRS Publication 552 (January 2011); Revenue Procedure 97-22.
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