By: Benny Kass
DEAR BENNY: I saw your column that appeared recently in our local paper. One writer asked you what papers he needed to keep on a house he has owned since 1988, including a couple of refinances. That made me wonder what papers I need to keep on houses my wife and I have bought and sold and no longer own. We purchased our first house in 1999 and sold it in 2002. We purchased our second home in 2002 and sold it in 2007.
We also owned a rental home that we sold in 2007. What, if any, paperwork should we still keep? For example, do we need to keep the deeds or the title insurance policies? --Steve
DEAR STEVE: As we move closer to a paperless society, it's hard to imagine that documents generated back in 1999 still have to be kept.
But, unfortunately, as the saying goes, "better safe than sorry."
Deeds and mortgages (also called deeds of trust) that have been paid off -- and recorded among the land records in the state or county where your house is located -- can be tossed out. Most jurisdictions now have all of these documents available online, so there is no need to hang on to them.
But you must make sure that those old mortgages, which you know you paid off, have in fact been released on the same land records where the original mortgage was also recorded.
How do you do this? If you have a document entitled "release" or "certificate of satisfaction" that shows a recording number on its face, you don't have to keep those documents.
But if you don't have such a release document, then you may want to ask a title attorney or title company (called escrow companies out West) to do a quick title search to make sure that all paid-off mortgages have, in fact, been released and recorded.
You bought your first house in 1999, so you can toss all documents relating to that house. I would, however, keep the settlement statements (called HUD-1) for both the purchase as well as the sale of the house.
If, however, you bought and sold houses before 1997, you absolutely must keep all HUD-1 forms. Why? Prior to May 1997, the law allowed you to "roll over" your profit into the new house.
For example, let's say in 1990 you bought a house for $100,000, and sold it in 1995 for $150,000. But in that same year, you bought a new house for $200,000. For this discussion, I am ignoring any improvements you may have made, although any such improvements will increase your tax basis.
You made a profit of $50,000. But since you purchased a new house within two years from the time you sold your other house, you could "roll over" the profits. What this meant is that although you paid $200,000 for the new house, your tax basis was only $150,000 (i.e., $200,000 minus $50,000).
Let's say that today you sell that house for $650,000 and are married and file a joint tax return. Under the new law (that took effect in 1997) you can exclude up to $500,000 of profit. (If you are single or do not file a joint return, you can exclude up to $250,000 of profit. The "rollover" no longer exists.)
In our example, the basis of your house (ignoring improvements) is $150,000. You sold it for $650,000, thereby making $500,000 of gain. You can exclude all of that gain and pay no tax when the property is sold.
But let's say you sell it for $700,000. You think that since you paid $200,000 for it, your profit was $500,000, which you can exclude.
Wrong! Because you took advantage of the old (now repealed) rollover, your tax basis is only $150,000. Gain is calculated on the difference between the tax basis of the house and the sales price.
Thus, you really need to keep all of the HUD-1 forms. Obviously, to reduce your gain, any improvements that you have made over the years -- with proof of the costs of those improvements -- will assist you should the Internal Revenue Service ever decide to audit you.
Talk to your specific tax advisers on your situation.
Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column.