Most people keep a careful record of canceled checks and receipts to
prove the deductions they claim on their tax returns. But they forget to keep, and
organize, their property records. This mistake can be costly: If you keep
sloppy records, your taxes can be unnecessarily high when you sell your real estate
holdings, or other investments and capital assets.
Be sure to keep all pertinent receipts and make a special effort to keep your records
up to date.
How long should you keep your records?
Most experts recommend that you keep tax records for at least three years, which is the
statute of limitations for an audit by the IRS under most circumstances. Property
records, however, should be kept much longer. This information can have an effect on
your taxes years later.
Generally, property owners should keep records on all property that they will need to
calculate gain or loss on when the property is disposed of, or on which they claim
depreciation. This includes such items as your home or other real estate, stocks and
bonds, and assets used in a business.
The reason for this diligence is because of "basis." Generally, the
basis is the purchase price of the property plus or minus certain adjustments. When
a capital asset is sold at a profit, a capital gains tax is owed on the difference between
the sales price and the seller's basis in the property. Or a capital loss can be
claimed if the basis is more than the sales price.
Capital improvements
A capital improvement is anything that adds to the value of property. This would
include paving a driveway, putting up fences, or adding central air conditioning.
Painting and repairs are maintenance items, however, and don't' increase the basis.
A home can be one of the trickiest assets to document. Most people save the
closing documents which is sufficient to prove the original cost, but many homeowners have
few of the receipts needed to prove the cost of capital improvements made over time.
Stocks and Bonds
Calculating the basis of stocks and bonds can be tricky. Generally, the initial
basis is calculated by adding any brokers' commissions and other sales expenses to the
price paid for the security. The tax basis is reduced by stock splits, so if you
paid $100 per share for a stock that splits three-for-one, you will have a $33.33 basis in
each of the new shares.
If you buy shares of the same stock at different times, the most common method to
figure basis is first-in, first-out. However if you keep careful records, you can
sell blocks of shares out of order and take advantage of a valuable option to manipulate
your tax liability, particularly if the share price has been volatile.
Be sure to keep records relating to the purchase as well as subsequent brokers'
statements. These will show the amounts and prices of any dividends reinvested in
new shares, which would alter the basis.
Other capital assets
The basis for artwork, antiques, jewelry and most other capital assets is simply the price
paid.
When property is inherited, the heir's tax basis generally is its fair market value on
the date of the previous owner's death. Because of this, the basis of inherited
property can be much higher than its original cost.
Heirs should keep copies of appraisals done for estate tax purposes. If none are
done and the property is expensive, it may be worthwhile to pay to have an appraisal done.
Property received as a gift is treated somewhat differently. Usually, the person
receiving the gift takes the same basis as the donor, unless the fair market value is
less.
This is not meant to be legal advice. Consult your tax professional.
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