Monday, April 26, 2021

How long do I have to keep this stuff?



"How long do I have to keep this stuff?" is the usual question you ask yourself when feeling that you are running out of room for all this "paper" that may never be needed. 

The paper receipt you get from your fast-food lunch may go directly into the trash.  The prudent consumer may keep it to reconcile it with their monthly statement and then, trash it.  The natural hierarchy with receipts and documents associated with purchases is that as the price or value goes up, the more important it is to keep them.  The question becomes "but for how long?"

The following table will give you an indication on how long certain documents related to your home need to be kept according to best practices of tax professionals.  IRS recommends that records are kept for three years from the date the taxpayer files their original return or two years from the date the tax was paid, whichever is later.  There is no time limit in the case of fraud or failure to file a tax return.

 

Document

Length of time to keep

Home Purchase/Sale Documents

Home purchase documents

Duration of ownership + 3 years

Closing documents & statements

Duration of ownership + 3 years

Deed to property

Duration of ownership

Home warranty or service contract

Until expiration

Community/Condo Association Covenants

Duration of ownership

Receipts for capital improvements

Duration of ownership + 3 years

Mortgage Payoff statements or Release of Lien

Forever, in case proof is needed

Annual Tax Deductions

Property tax statement & cancelled check

3 years after IRS due date for return

Year-end mortgage statements

3 years after IRS due date for return

Federal tax returns

3 years after filing return or
2 years after paying tax, whichever is later

Insurance and Warranties

Home Inventory

Keep current

Homeowners insurance policy

Until the replacement is received

Service contracts and warranties

Until warranty/service contract expiration

Home repair receipts

Until warranty/service contract expiration

 

Going digital with your records can make them easy to keep as well as to find when you need them.  Create a folder on your computer that automatically backs up to the cloud like Dropbox, Google Docs or OneDrive so that if something happens to your computer, you have them safely tucked away. 

The main folder could be the address of your home with subfolders for purchase documents, capital improvements, warranties, etc.

When you receive statements that are already in digital format, simply move them to the correct folder and subfolder.  If it is a paper format, scan it and save it in the proper folder so you will have it when you need it.

Monday, April 19, 2021

Rent your home tax free



There is a little-known provision in the tax code that allows homeowners to rent their principal residence or second home for up to 14 days a year without having to recognize the income.  In this situation, the taxpayer does not deduct the rental expenses associated with the income.

There is no restriction on how much you earn.  If your first or second home is in a desirable area where people are looking for short-term rentals, it could provide a windfall to the homeowner.

In cities where any big sports championships are played, there could be a market for a temporary rental of a home.  Events like PGA tournaments, college basketball tournaments, Bowl games, NFL playoffs and others can create a demand for this type of rental.

For instance, there are people in Augusta, Georgia who rent their homes during the Master's Golf Tournament each year.  There are not a lot of hotel rooms in the area relative to the number of people who usually attend in non-pandemic years and the homes can fetch a nice daily rate.

There can be confusion about the different types of properties and what constitutes a home.  The intended use coupled with actual experience will usually determine the type of property.

There are four types of property.  A principal residence is the home you live in.  There is income property that you rent and do not live in.  There is investment property that is primarily held for an increase in value.  And, there is inventory, which is related to your business like homes that are built or purchased to be flipped.

A second home is one that is used for the primary enjoyment of the owner in addition to their principal residence.  Taxpayers are allowed to deduct the mortgage interest and property taxes on a first and second home up to specific limits.  A vacation home could be another name for a second home but more accurately, it is a rental property that has more than 14 days of personal use during the year.  It becomes a hybrid.

You might want to check with your insurance agent to see if your current policy covers temporary rentals, including liability in case of an accident involving personal injury.  This could affect your decision as to whether you want to consider the rental.

For more information, see IRS facts about renting out a residential property or consult your tax professional.

Tuesday, April 13, 2021

Before you pay cash for a home



Before you pay cash for a home, ask yourself if there is a possibility, at some point in the future, you might put a mortgage on the home and would want to deduct the mortgage interest on your federal tax return.

Current federal tax law allows homeowners to deduct the interest on up to $750,000 in acquisition debt used to buy, build or improve a property.  When a person pays cash for a home, the acquisition debt is zero.  The only way to increase the acquisition debt is to make and finance the improvements to the home.

As with many IRS regulations, there are exceptions to this rule.  If a mortgage is secured on the first or second home within 90 days of the purchase closing, the debt is considered acquisition debt.  The interest on the funds used to purchase the home can be deducted on up to $750,000 of the mortgage balance.

Assuming a borrower has good credit, the ability to repay the loan and the home justifies the loan, lenders are willing to make mortgages for homeowners.  It does not mean that the interest on the mortgage will be deductible.

Additional information can be found in Publication 936, Home Mortgage Interest Deduction, of the Internal Revenue Service at IRS.gov.

To deduct home mortgage interest, you must file Form 1040 or 1040-SR and itemize deductions on Schedule A.  The mortgage must be secured debt on a qualified home in which you have an ownership interest.  Interest on home equity loans is only deductible if the borrowed funds are used to buy, build or substantially improve the taxpayer's home that secures the loan.

If you answered yes or even maybe to the question first posed in this article, contact your tax professional to determine the best way to approach your individual situation.  For more information, download the Homeowners Tax Guide.