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.

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.

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.

Optimize Your Sales Price

Doing a lot of work to a car before you trade or sell it to a dealer is not generally a good idea.  In most cases, you won't recapture the cost of the repairs.  They can do the repairs for a less than you can.  Not to mention, you are selling to a wholesaler who needs to sell it again to the end user and still make a profit.

A home sale is totally different.  The owner is selling the home to an end user.  Since the buyer, in many cases, is using their available funds for the down payment and purchase costs, they don't have money to spend on repairs or decorating the home.  They would need to live in it "as is" for a while which may not be as appealing as finding a home that is refurbished, up-to-date, and ready to move into.

Even if the buyer would be willing to get a home improvement loan after the sale, it would be a separate loan at a higher interest rate making their payment higher than financing it all in one mortgage at the lower first mortgage rates.

The seller may experience some inconvenience going through the remodeling process, but it will, most likely, result in a higher sales price in less time.  Occasionally, sellers say they'll let the buyer choose their own colors but not all people have the imagination to know what something will look like after it is finished.  It is better to go ahead and get the work done before putting it on the market.

The bathrooms and kitchen are the most important rooms to update.  If the finish on the cabinets is bad, have them painted.  New countertops and appliances can make a world of difference.  Paint, countertops, and fixtures in the bath give the home a great feel.

In addition to the repairs, a major cleaning and decluttering can make a home look and feel better than the competition.

The first step is to go through the home and pack up or get rid of things you don't need or things that detract from the home like excess furniture, exercise equipment, personal artwork, etc.  Now, do the same with the closets and cabinets.  By getting rid of things, there will be more room and they'll look larger.

Next, walk across the street from your house and give it a critical look.  How is the drive-up appeal?  Would you want to go inside to see the rest if you were a buyer?  Are the trees and shrubs trimmed?  Yard cleaned up?  Do you have blooming flowers in the beds?  Does the front door and mailbox need a new coat of paint?  Do you need to power wash the outside of the home and the sidewalks and driveway? Do the windows need washing?

Buyers are visual people and beauty is always rewarded.  Restaurants know that people eat with their eyes first and they go to a lot of effort to plate the food so it is visually appealing.  The same approach works for selling a home.  Ask your agent if they have ever taken a buyer to a home that refused to go inside because they didn't like the looks from the street.

Your real estate professional can make specific recommendations and assist you in finding someone to do the work.  This is what they do.  TRUST THEM!

Say "NO" to FSBO

To understand the reasoning behind why a homeowner should not sell their home by themselves, we need to identify the motivation.  Probably, more times than not, the homeowner wants to "save" the cost of the commission.  It certainly represents a significant amount of money.

In 1981, homes sold For Sale by Owner represented 15% of the homes closed while 85% were agent-assisted.  The percentage of sellers handling their own homes alone has declined over the decades to only 8% of homes sales in 2020.  Interestingly, half of the sellers knew the buyers and the other half did not.

The FSBO sellers who knew the buyers, who were predominantly a friend, relative or neighbor, had a market time of less than a week and received 100% of the asking price, less expenses of course.

According to the NAR 2020 Profile of Home Buyers and Sellers, 50% of FSBO sellers determined the asking price of their home by recent home sales in the area while slightly more than 1/3 used an appraisal. 41% of sellers stated they did not want to pay a fee or commission as the reason they sold it FSBO.  Another 30% did so because they had a relative, friend or neighbor who wanted to buy their home.

A significant problem encountered by For Sale by Owners was exposing their home to the marketplace.  They run the risk of selling the home for a lower price because it is not marketed to the highest pool of available buyers.

Negotiating on their own behalf is another concern many for sale by owners share.  There are so many different things as well as people with whom to negotiate.  For instance, besides the sales price in the contracts, other negotiable terms include financing concessions, closing and possession dates, inspections and earnest money.  However, the negotiations could continue well up to the moment of closing with repairs, appraisals and other unforeseen things.

While the seller might feel uncomfortable negotiating directly with a buyer, there could also be negotiations with the appraiser, inspectors, mortgage company or escrow company.  The layer of separation that exists between the seller and other parties is the real estate professional.  They are trained to de-escalate sensitive areas so that feelings are not hurt as well as acting as a go between so the way something is said can be minimized.

Difficulties experienced by FSBOs include negotiations with the buyer, not familiar with the process and standards that are involved in the 92% of the transactions that are agent assisted. 89% of Sellers say they were satisfied with the service their agents gave and would use them again and recommend them to others. 

A seller should realize the motivation of a buyer wanting to deal directly with a seller without an agent.  They are trying to save the commission but both buyer and seller cannot save the commission.  The more knowledgeable and possibly, the better negotiator will usually benefit the most.

13% of the sellers were contacted directly by the buyer.  It is conceivable that these buyers may have been trying to take advantage of an unknowledgeable seller to eliminate competition and purchase a home at a lower than market value.

In a seller's market, a FSBO can sell their home.  The question will be whether they received the highest price with the best terms and the fewest problems.  Protecting a large financial asset is important and sellers deserve the peace of mind that a real estate professional provides along with the fiduciary duties that accompany them.

The median price achieved by For Sale by Owners is considerably less than the median price sold by agents.  While there may be other factors involved, it certainly introduces the question "is the FSBO is selling below fair market value?"

Before embarking on the sale of your home by yourself, talk to a real estate professional or possibly two, to get as much information as possible to make an informed decision.  Your objective should be to maximize the proceeds from the sale.  For more information, download the Sellers Guide.