Don’t Read This If You Want To Pay More Taxes Than You Should On Real Estate Transactions

Don’t Read This If You Want To Pay More Taxes Than You Should On Real Estate Transactions

There are two things one has to do to overcome being tax dumb: show documentation and the flow of the money.

One needs to do both to sustain an audit and decrease exposure to capital gains taxes.

Be it an investment property, one’s home or simply an itemized deduction, keeping solid documentation and knowing the sources of money are strong support actions you can take to handle a tax audit and perhaps lessen the tax burden.

For this discussion the focus is on real estate documentation.

When entering or closing real estate transactions one ends up with 20 million pieces of paper, of a print size necessitating a magnifying glass to read the documents.

Consider all of these papers as important and put them in a folder.

Listed below is how I manage my documentation but to be sure you can add or subtract as you see fit.

My folder includes the following sections:

The Tax Documentation Section Should Cover All:

-Offers and counter offers

-Preliminary HUD (mortgage cost)

-Home inspection (even on a new home)

-Structural inspection (if necessary)

-Pest control reports

-Soil reports (if you buy on a hillside or know that the land is unstable)

-Warranties and associated manuals including the builders home warranties

-Home Owners Associations bylaws (if applicable).

-All email and written notes about the transaction

-Pictures of the property (inside and out)

-Any repair reports if purchasing a used home.

If buying a ranch……..

Have a well and water check.  This should be a normal action taken by the buyer’s agent but if it is a private sale one would want a well test and water test for purity and pressure.  A smart lender will insist that this be done.

Septic tanks. Get all documentation and tests previously done and ask if there had been any repairs to the tank.  A septic tank test will last for about 24 hours with water running into it continuously to determine its draining capabilities.  Find out how old the tank is and when it was cleaned last.

Water rights.  More important than gold.  

The Flow of Money Section Should Include:

-Appraisals

-Capital improvements (such as an addition).

-Contracts and information about the method of payment (checks/automatic transfers).

-Most definitely show the source of the funds (line of credit, savings or loan) for purchase and improvements.

The IRS loves to ask “Where did the funds come from to …….?”

Proof of Basis Section:  You will need—-

-Final settlement statements (Purchase and sale).

-Mortgage notes, loan addendums and lines of credit

-Deed

-Plat map

-Title insurance

-Escrow instructions

-Reconveyance documentation

If it is an Investment Property, Include This Section

-Property management agreements and addendums

-Tenant agreement and addendums

-Credit reports

-Pictures of the property inside and out before the tenant moves in.

Have a Section For Insurance:

-Hazard

-Liability

-Umbrella

-Rental insurance

-Loss of income and home warranty insurance policies.

No matter what, strive to keep track of where the cash came from.

Keep copies of your checks and receipts. Make a copy of your bank statement(s) and show notes of funds deposited and payments. If an investment property have a separate bank account. You will be glad you did.

Make copies.

Keep one set of the copy material close at hand. Keep another set (the originals) at a different location (bank deposit box). In the event of a fire, flood, etc., it is nice to know that all of your key documentation are available.

The main thing is to show the flow of money…..how you got it and how it was dispersed.


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