With spring and tax season upon us, many rental property owners are sorting through and cleaning out stacks of files and records. But just because you’ve filed your taxes or a tenant is moving out doesn’t mean it’s time to throw out your receipts and other documentation. Rental property owners have special circumstances to consider for keeping and cleaning out old records.
Why keep records?
Record keeping is important both financially and legally. Rental property owners need to track income and expenses so they can determine how profitable their investment properties are. Real estate investors need accurate, detailed financial records to file tax returns. Supporting documents from tax returns are necessary, should the IRS perform an audit.
Plus, landlords need to keep records regarding applicants and tenants so the property owners are prepared should any disputes or civil litigation arise. Your records can help prevent disputes and prove your case in court.
Which items should you keep?
Real estate investors need to keep five types of records:
Financial records
When you buy a rental property, start a new file for its records. Keep any purchase-related documents, like closing statements, purchase invoices, sale invoices, appraisals, valuations, and proof of payments. If you make any capital improvements to the property, retain that documentation as well. Keep your purchase and improvement documents as long as you own the property plus three years.
Save your records of rental income, rental expenses, and all the supporting documentation like receipts, canceled checks, and payment confirmations. Anything that will back up your tax return acts as proof if the IRS audits you. Officially, the IRS recommends keeping your supporting tax documentation for three years after you file the related taxes. However, the IRS can go back seven years if you’re suspected of underreporting income or if you try to write off debt incorrectly. Many financial experts recommend keeping records for seven years after selling property. Check with your state tax agencies as well because some state guidelines align with the federal government’s (three-year minimum), but others can go up to a decade depending on the state.
Keep any mortgage payoff notices forever. Save documents related to section 1031 exchanges—both the old and new property—as long as you own the new property plus three years.
Legal records
Unfortunately, disputes with tenants and applicants happen. Be prepared by keeping these tenant-related records on file:
- Lease agreements
- Tenant applications, including rejected, accepted, and withdrawn applications
- Authorizations for tenant background checks and credit checks
- Sent and received inquiries regarding prospective tenants
- Screening interviews
- Complaints
- Records of property damage
Having these documents available will help you prove your tenant-landlord relationships and solve disputes over security deposits, rent, or fair housing complaints. Even after a tenant moves out, don’t dispose of their records immediately. Although the time frame varies by state, tenants and applicants have between five and seven years to file a civil suit. Because of possible litigation, most landlords keep tenant files for at least seven years. Be sure to keep your files until you are no longer liable.
Employee records
If your rental property business has employees, you must keep employee files like payroll tax records and withholding returns. Check with your state employment agency to verify its documentation requirements, and see IRS Circular E, Employer’s Tax Guide, for the federal guidelines.
Policy and procedures records
Keep any policy or procedure documents related to your properties—think about insurance policies and homeowners or condo association covenants and codes. The best practice is to store these documents for as long as you own the property plus three years. Never dispose of an insurance policy still in effect. If the policy has ended, but you still have an open claim, keep the policy records until you settle the claim. Once a policy has ended and has no open claims, you can dispose of the documents after three years.
Other business records
Save any records relating to ongoing contracts related to your rental property. For example, if you have a warranty on the appliances in your rental unit, keep the warranty and purchase information together until the warranty ends. Hang on to your appliance manuals until you replace the appliance. If you have a service agreement for your property, keep those contracts in your file for as long as the contract is active.
For deeds or partnership and LLC agreements, store those records for as long as you own the property or as long as the entity exists.
How should you store records?
The IRS can work with both paper and digital records, so you’re free to choose the option that works best for you. Have a separate file for each of your rental properties.
If you keep physical paper records, store the files in a locked file cabinet. Although paper records are easy to maintain, they are bulky and take up valuable space. Physical records also come with the risk of losing critical information due to fire, water, or pest damage.
For digital records, protect them with a password and either have a backup copy stored on a thumb drive or use a cloud-based storage option to ensure that your files are never corrupted or lost. Keep your physical backup in a separate location, like a bank deposit box, or a fireproof safe. REI Hub offers cloud-based receipt and document storage included with your subscription so you can easily keep track of your rental property’s documents and notes.
When and how do you dispose of records?
Whether you choose paper or digital records, you’ll still need to dispose of files occasionally. Establish rules about when and how you will clean out files. Check your documents at least once per year to ensure they’re in good order.
When it’s time to dispose of a document, don’t just throw it in the trash or recycling. Most property-related documentation contains personal information, like your contact information, account numbers, social security numbers, etc. If that sensitive information falls into the wrong hands, it could lead to identity theft. Protect yourself by shredding your old physical documents. If you delete an old digital file, make sure the deleted file isn’t sitting in your computer’s recycle bin.
Takeaways
Document storage and filing may seem like unimportant or menial tasks, but having well-organized, comprehensive records helps protect you financially and legally. If you aren’t sure how long to keep a document, check with your lawyer or tax preparer. Generally speaking, keep receipts for repairs and capital improvements until you sell the property. Move tax documents older than three years into deep storage. After seven years, you can shred them or safely dispose of them. Remember—the most important guideline is to keep critical documents until you’re no longer liable.
