Many of us are not as organized as we’d like to be, but sometimes it’s worth extra effort to organize records pertaining to real estate if you own any property. Why? Because not keeping records can cost you time and money.
Which records? I’m referring to those that pertain to buying or selling a property (purchase/sale agreements and escrow instructions), as well as any and all documents related to insuring or inspecting or improving your house. You never know when you’ll need to prove that you did things by the book (and how much they cost). You should also hold on to payment records for mortgage interest and property tax.
Take home improvements, for example. The Internal Revenue Service requires receipts that show how much things cost (not how much they were estimated to cost or what the market value was, but how many dollars exchanged hands). If you own your home for 20 years and then decide to sell, you’ll need to be able to show the cost of improvements. You may be thinking you’ll never sell your house—and that may be so—but I promise you’ll die someday, and your heirs will find it invaluable to have documents in a clear, legible format that are easy to find and easy to understand.
If you update your home in a way that requires a county permit, be sure to keep all the paperwork related to your permit, because people run the county and people make mistakes. Recently a homeowner was very grateful the previous owner had kept good records, including a final permit, because the county had no record of the permit for a room addition. If the homeowner had not been able to produce the permit, the county could have required that the addition be torn down or that the current homeowner pay to bring the addition up to current building codes.
Having good records can also protect you if someone believes you shirked your responsibilities in addressing problems discovered during the inspection process. If you have work records that outline all the work that was done (or supposed to be done), you can prove you acted in good faith. If a contractor does not do his part, keeping records allows you to go back and have a conversation about why work was not done as it should have been.
If you have an investment property, keeping records becomes even more critical. I know a woman who now owns a medium-sized apartment complex. Her basis for property tax purposes goes back 35 years and travels through several exchanges. Her entire basis starts with a small single-family home rental that was exchanged for a duplex; that was exchanged for a four-plex; that was exchanged for an eight-plex, and that was exchanged for a 16-unit apartment complex. Capital gains taxes are typically assessed on the value of a given property when it is purchased, but if you trade up via exchanges, your original basis remains unchanged (in this case, the original basis was only $4,000). If this client sold the apartment complex and did not have good records of the amount of money she spent on improvements to verify the tax basis through all the exchanges, the taxes would be calculated on the difference between the sales price today and the $4,000 property value 35 years ago.
While keeping good records is about as fun as watching paint dry, it is worth it. If you’re diligent and knowledgeable enough to weed through documents to keep only those you’re likely to need, more power to you. If you’re like the rest of us, just keep them all. Heck, scan them and save them electronically. You’ll be glad you did.
If you have questions about real estate or property management, please contact me at firstname.lastname@example.org or visit www.realtyworldselzer.com. If I use your suggestion in a column, I’ll send you’re a $5.00 gift card to Schat’s Bakery. If you’d like to read previous articles, visit my blog at www.richardselzer.com. Dick Selzer is a real estate broker who has been in the business for more than 40 years.