How long to keep receipts after filing income tax

Likewise, if you sold a house, you will need documentation proving what you paid for and what you received from its sale. And if you sold a rental property, you’ll need detailed records of how much you’ve invested in the property over the years, as well as how much you’ve deducted for depreciation. It’s wise to keep Schedule E, the form you fill out each year for rental income, for as long as you own the property.

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How long to keep it

You’ve probably heard that seven years is the ideal time to keep tax records, including returns. According to Steven Packer, CPA, of Duane Morris’ tax accounting group, the actual length of record retention isn’t that straightforward.

“In most cases, tax records don’t have to be kept for seven years because there’s a three-year statute of limitations,” says Packer. “So assuming there’s no fraud or anything else wrong, the IRS can’t review your tax returns beyond that three-year status.

The statute of limitations has a few important exceptions, and if your tax return contains any of these exceptions, you will need to keep your returns and records for more than three years. For example, the statute of limitations is six years if you grossly underestimated your income. The substantial understatement threshold is 25% of your gross income. If you claim your gross income was $50,000 and it was actually $100,000, you have grossly understated your income.

The six-year rule also applies if you have significantly overstated the cost of the property in order to minimize your taxable gain. Suppose you sold a property for $150,000 and paid $125,000 instead of the actual $50,000, the IRS has six years to take action against you. And if you missed more than $5,000 of income from an offshore account, the statute of limitations is also six years.

Keep records for seven years if you file a claim for loss of worthless securities or bad debt deduction. If you did not file a return or if you filed a fraudulent return, the IRS does not have a statute of limitations to bring charges against you.

Ownership records can be forever

When you sell a property for a profit, you will have to pay capital gains tax on that profit. Calculating your capital gain often requires you to keep your records for as long as you own your investment. You will need these records to calculate the base cost of ownership, which is the actual cost, adjusted up or down by other factors, such as major structural upgrades.

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