Tax records for homeowners: what to keep and for how long

What basis means

Basis is, roughly, what you have invested in the home for tax purposes. When you sell, your gain is the amount you realize from the sale minus your adjusted basis. A higher basis means a smaller gain.

For a purchased home, basis starts with the price you paid, including the down payment and the mortgage. It then goes up with certain closing costs and improvements, and down with certain items such as some energy credits or subsidies you received for improvements. Publication 523 includes worksheets that walk through each step.

Purchase costs that add to basis

Publication 523 lists settlement fees and closing costs you can include in basis:

• abstract of title fees
• charges for installing utility services
• legal fees, including fees for the title search and preparing the sales contract and deed
• recording fees
• survey fees
• transfer or stamp taxes
• owner's title insurance

It also lists costs you cannot include, such as fire and casualty insurance premiums, rent for living in the house before closing and charges connected with getting a mortgage loan. Those loan charges include mortgage insurance premiums, the VA funding fee, the credit report, the lender's appraisal fee and points. Amounts placed in escrow for future taxes and insurance do not count either.

Your Closing Disclosure or settlement statement lists all of these. It is the single most important document to keep.

Improvements versus repairs

Publication 523 says improvements add to the value of the home, prolong its useful life or adapt it to new uses, and their cost is added to basis. Its examples include:

Repairs and maintenance that keep the home in good condition without adding value or prolonging its life do not count. The publication gives painting, fixing leaks, filling holes or cracks and replacing broken hardware as examples. Improvements that are no longer part of the home, like carpet you later replaced, and improvements with a life expectancy of less than a year are also excluded. Repair-type work done as part of an extensive remodeling or restoration can count as part of the improvement.

How long to keep records

The IRS's general guidance is to keep records for three years from the date you filed the return in most situations, with longer periods in specific cases. For property, its guidance is different: keep records relating to property until the period of limitations expires for the year in which you dispose of the property, because you need them to figure gain or loss.

In practice:

• Purchase and improvement records: keep them as long as you own the home and for at least three years after you file the return for the year you sell.
• Yearly items such as Form 1098, property tax bills and receipts for deductions: keep them with each year's return.
• Records from a previous home: if your basis carried over from an earlier home under older rules, keep those records too. Publication 523 explains when this applies.

The exclusion and why records still matter

Publication 523 lets you exclude up to $250,000 of gain, or $500,000 for married couples filing jointly, if you meet the eligibility tests. Generally, you must have owned the home and used it as your main home for at least two of the five years before the sale.

Many sellers never owe tax on a home sale because of the exclusion. Records still matter because:

• gains can exceed the exclusion in high-cost areas or after long ownership
• you may not qualify for the full exclusion, for example if you sell sooner than two years
• rental or business use of part of the home changes the calculation

Setting up a system

A simple folder, paper or digital, is enough. Scan each document when you receive it and keep the original for anything major. Label files by year and by project. Back up digital files in a second place.

The bottom line

Your home's basis starts with the purchase price and rises with certain closing costs and improvements. IRS Publication 523 lists which ones count. Keep your settlement statement, deed, title policy and every improvement record for as long as you own the home and for the limitations period after you sell. Those papers can decide how much of your gain is taxable.