Records: what to keep and for how long

Real estate generates paperwork over decades, and the document you need at sale is frequently one created at purchase, by a person who is no longer available, in a filing system you abandoned.

The categories

Acquisition documents, kept permanently.

Purchase agreement, settlement statement, deed, title policy, survey, inspection reports, the land and improvement allocation with its support, and any appraisals.

The settlement statement establishes your basis and the closing costs added to it. It will be needed at sale, however far away that is.

Capital improvements, kept permanently.

Every improvement adds to basis and reduces the eventual taxable gain. Invoices, contracts, permits and proof of payment.

An owner who spent $80,000 on improvements over twenty years and can document $30,000 of them pays tax on an extra $50,000 of gain. That is a real and avoidable cost.

Depreciation schedules, kept permanently. Required at sale to calculate recapture, and to demonstrate the position taken over the holding period.

Financing documents, kept for the life of the loan and beyond.

Note, mortgage or deed of trust, amortization schedule, payoff statements, and evidence of satisfaction when the loan is retired. The last of these matters — an unreleased lien discovered at closing delays sales.

Income and expense records, kept according to tax record retention requirements, which are generally several years but longer in certain circumstances, and longer still where they relate to basis.

Rent receipts, bank statements, invoices, receipts, mileage logs, and the annual reconciliations.

Tenancy records, kept for the tenancy plus the applicable limitation period for claims.

Applications, screening results and the criteria applied, leases and amendments, deposit records including where held and interest paid, move-in and move-out inspections with photographs, all notices served, maintenance requests and responses, and any correspondence about disputes.

The screening records deserve emphasis. If a fair housing complaint is made, the defense is documentary evidence of consistently applied criteria. Recollection is not a defense.

Insurance, including expired policies. Some claims arise long after the policy period, and the policy in force at the time of the event is the one that responds.

Compliance records — inspections, licenses, registrations, lead paint disclosures where applicable, smoke and carbon monoxide alarm certifications, and any local rental registration requirements.

The repair versus improvement distinction

Worth recording at the time, because reconstructing it later is difficult and the tax treatment differs.

Broadly, a repair maintains the property in its existing condition and is generally deducted currently. An improvement betters it, restores it, or adapts it to a new use, and is capitalized and depreciated.

Replacing a broken window is generally a repair. Replacing all the windows is generally an improvement. The rules contain specific tests and safe harbors, and a tax professional should apply them.

The practical point is to note the nature of the work on the invoice at the time, along with photographs, so the classification can be supported years later.

A system that works

One folder per property, in cloud storage, backed up.

Subfolders: acquisition, financing, improvements, income and expenses by year, tenancies by unit and tenant, insurance, compliance, tax.

Photograph or scan every paper document on receipt. Name files with date and description so they sort chronologically.

Separate bank account per property, or at minimum per portfolio, never mixed with personal funds. This matters for bookkeeping and it matters far more if you hold in an entity, where commingling undermines the liability protection.

Accounting software, even basic, reconciled monthly rather than annually. The annual reconstruction from a shoebox is where errors and omissions enter.

Photographs

Undervalued and free.

Photograph the property at purchase, comprehensively. Photograph every unit at move-in and move-out, with date stamps. Photograph before and after every significant repair or improvement. Photograph any damage.

Move-in and move-out photographs are the single most effective tool in deposit disputes, and they resolve most of them before they escalate.

What to do now if you are behind

Reconstruct what you can while it is still possible. Request settlement statements from the title company. Request payment histories from lenders. Pull permits from the municipality, which document improvement work. Ask contractors for copies of old invoices.

Then start the system properly from today, which is worth more than perfecting the past.

General information about record-keeping, not legal or tax advice. Retention requirements and record-keeping obligations vary by jurisdiction. Consult qualified professionals about your own circumstances.