taxes – The Real Estate Beat

Wherever you buy a home in the United States, property taxes are a reality of homeownership. An agent who is a REALTOR® can help connect you with a tax expert in your area, but here are the basics:

What are property taxes?

Property taxes are charges on your land and property, based on the value of your property, levied by your local government. The revenue generated is often used to fund community needs such as schools, police and fire departments, and road maintenance. Some states also tax personal property, such as cars and boats.

Can I know the property tax on a home before I purchase it?

Real estate listings, usually from your local multiple listing service, typically include information on a property’s annual taxes. You can also ask the seller directly about their latest tax bill and when the property was last reassessed. Depending on the location, the assessed value—which is different from and generally less than the market value—of the property may increase based on the amount you pay for it.

How are property taxes calculated?

Tax rates vary widely depending on where you live. The most common method for calculating property taxes is by multiplying the assessed value your local government assigns to your property, minus any tax reductions, by the local tax rate. The assessed value is usually calculated as a percentage of the property’s market value. It reflects the overall quality and condition of the property, comparable homes in the area, and market conditions, among other factors.

The other component of the equation is the tax rate, often called the millage (“mill”) rate, equaling the property tax you owe for every $1,000 of your property’s value. For example, if the mill rate is $0.005, your home’s assessed value is $200,000, and you are ineligible for tax reductions, the following calculation would apply: ($200,000 in assessed value – $0 in tax reductions) x $0.005 mill rate = $1,000 property tax.

Are there property tax exemptions?

Certain homeowners may qualify for tax exemption programs which can lower, or even eliminate, their property tax bill. Senior citizens, veterans, disabled persons, and surviving spouses are some of the homeowner groups that may be eligible. Additionally, most states offer a homestead tax exemption for individuals’ primary residences. Programs and eligibility criteria vary by state, so consult a tax expert to determine which programs may apply.

How do I pay my property taxes?

The most common method for paying property taxes is through an escrow account, where a portion of your monthly mortgage payment is held and automatically paid towards your tax bill when it is due. You may choose to pay your taxes on your own, although in some cases your lender may require you to use an escrow account to ensure payments are made on time.

How often are properties reassessed?

Properties are generally reassessed annually to ensure any new community upgrades, such as the construction of a new school, and/or house upgrades, such as finishing a basement, are factored into the assessed value of your residence.
Can I challenge my property tax rate? If you feel your property taxes are unfair—meaning you believe your house is not actually worth as much as it was assessed for—you can appeal the assessment and request a second evaluation of the property. There is typically a short window of time for submitting an appeal, so be sure to closely follow your local municipality’s instructions and timeline.

What are transfer taxes?

Separate from your annual property tax, transfer taxes are a one-time fee charged when the title of a property changes hands between the seller and buyer. Transfer taxes are an important consideration and can affect the overall cost of buying or selling property. The rates vary by location, and either the buyer or seller can pay the tax, depending on local laws, so be sure to work with your agent and legal counsel in negotiating the terms in your purchase agreement.

Practices may vary based on state and local law. Consult your real estate professional and/or an attorney for details about state law where you are purchasing a home. Please visit facts.realtor for more information and resources.

NOTE: Consumer guides do not constitute any change in NAR policy. Real estate professionals must ensure they market properties consistent with relevant MLS rules and educate sellers on the choices available.

I read this article HERE.

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For most tax deductions, you need to keep receipts and documents for at least 3 years.

Unless you live in a Hollywood Hills mansion, you probably don’t have space to store years of tax and insurance paperwork, warranties, and repair receipts related to your home. And if you’re keeping digital records, you likely don’t want to keep adding new records every year without a plan for managing the old records.

The paperwork or digital records will help you if you need to prove you qualify for the tax deductions you took, to file an insurance claim, or to figure out if your busted oven is still under warranty.

To help you wrangle those records, here’s a handy checklist of how long to keep tax records.

Tax Recordkeeping Insights from the IRS

For recordkeeping, align with IRS guidance and all tax record rules.

IRS Tax Return Requirements

Consider this background information on IRS rules on how long to keep tax records, which informed some of our charts:

At least three years. In most cases, the IRS says you should keep tax returns and the paperwork supporting them for at least three years after you file the return — the length of time the IRS has to audit you. So that’s how long we advise. Under some circumstances, however, you should keep them longer.
Varies by state. Check with your state about state income tax returns. Most states make you keep them as long as the federal government does — three years in most cases. But Montana wants you to keep them for five years. And Ohio recommends you hang on to them 10 years. Yes, an entire decade.
Up to six years. The IRS can also ask for records up to six years after a filing if they suspect someone failed to report 25% or more of their gross income on their income tax returns. And the agency never closes the door on an audit if it suspects fraud. Just sayin’.

How Long to Keep Each Category of Tax Documents

Here are some guidelines for how long to keep tax records based on record type.

Keep Home Sales Records for as Long as You Own the Property + 3 Years

HOME SALE RECORDS
Document	How Long to Keep It
Home sale closing documents, including closing statement	As long as you own the property + 3 years
Deed to the house	As long as you own the property
Builder’s warranty or service contract for new home	Until the warranty period ends
Community/condo association covenants, codes, restrictions (CC&Rs)	As long as you own the property
Receipts for capital improvements	As long as you own the property + 3 years
Mortgage payoff statements (certificate of satisfaction or lien release)	Forever, just in case a lender says, “Hey, you still owe us money.”

Why you need these docs: You use home sale closing documents and receipts for capital improvements records to calculate and document your profit (gain) when you sell your home.

Your deed and mortgage payoff statements prove you own your home and have paid off your mortgage, respectively.

Your builder’s warranty or contract is important if you file a claim. And sooner or later you’ll need to check the CC&R rules in your condo or community association.

Keep Annual Tax Deductions for 2-3 Years

ANNUAL TAX DEDUCTIONS*
Document	How Long to Keep It
Property tax payment (tax bill + canceled check or bank statement showing check was cashed)	3 years after the due date of the return showing the deduction
Year-end mortgage statements	3 years after the due date of the return showing the deduction
Tax returns	3 years from the date you file your return or 2 years from the date you paid the tax, whichever is later

Why you need these docs: To document you’re eligible for a deduction or tax credit in case you’re audited by the IRS.

*These deductions are relevant if you itemize. The standard deduction has been increased, which means fewer people will itemize than have in the past.

Keep Insurance and Warranties Until They Expire

INSURANCE AND WARRANTIES
Document	How Long to Keep It
Home repair receipts	Until warranty expires
Inventory of household possessions	Forever (remember to make updates)
Homeowners insurance policies	Until you receive the next year’s policy
Service contracts and warranties	As long as you have the item being warrantied

Why you need these docs: To file a claim or see what your policy or warranty covers.

Keep Investment Real Estate Deductions as Long as You Own the Property + 3 Years

INVESTMENT (LANDLORD) REAL ESTATE DEDUCTIONS
Document	How Long to Keep It
Appraisal or valuation used to calculate depreciation	As long as you own the property + 3 years
Receipts for capital expenses, such as an addition or improvements	As long as you own the property + 3 years
Receipts for repairs and other expenses	3 years after the due date of the return showing the deduction
Landlord’s insurance payment receipt (canceled check or bank statement showing check was cashed)	3 years after the due date showing the deduction
Landlord’s insurance policy	Until you receive the next year’s policy
Partnership or LLC agreements for real estate investments	As long as the partnership or LLC exists
Section 1031 (like-kind exchange) sale records for both your old and new properties, including HUD-1 settlement sheet	As long as you own the new property + 3 years

Why you need these docs: For the most part, to prove your eligibility to deduct the expense. You’ll also need receipts for capital expenditures to calculate your profit (gain) or loss when you sell the property. Landlord’s insurance and partnership agreements are important references.

Keep Miscellaneous Records 3-4 Years

MISCELLANEOUS RECORDS
Document	How Long to Keep It
Wills and property trusts	Until updated
Date-of-death home value record for inherited home, and any rules for heirs’ use of home	As long as you or your spouse owns the home + 3 years
Original owners’ purchase documents (sales contract, deed) for home given to you as a gift	As long as you or your spouse owns the home + 3 years
Divorce decree with home sale clause	As long as you or your spouse owns the home + 3 years
Employment records for live-in help (W-2s, W-4s, pay and benefits statements)	4 years after you make (or owe) payroll tax payments

Why you need these docs: Most are needed to calculate capital gains when you sell. Employment records help prove deductions.

3 Ways to Organize Your Tax Records and Receipts

Keeping your tax documents well organized is key. Then you’ll easily be able to access any records if you need them.

If you haven’t already switched to digital recordkeeping, consider scanning and digitally storing paper documents, such as receipts, which fade with time and take up space. Even better, save your documents to at least two digital locations.

Digital copies are OK with the IRS as long as they’re identical to the originals and contain all the accurate information that was in the original receipts. You must be able to produce a hard copy if the IRS asks for one.

Here are three practical ways to store IRS paperwork digitally and get rid of the paper.

#1 Computer Hardware

Flash drives or external hard drives are designed to store documents and other data. Flash drives are portable and tend to be smaller than external hard drives, so they’re easy to store. External hard drives usually have a larger memory capacity and are more durable than flash drives. Both can be used to store tax returns and other IRS documents safely.

#2 Cloud-Based Software

Unlike storing your tax data to a physical device, like a flash drive, a cloud-based remote server offers similar storage capabilities to a virtual server. This means you don’t have to keep track of the device itself. Instead, you can access your tax records remotely through a cloud computing platform.

#3 Apps

Another digital data storage option is to use apps, such as Smart Receipts, which is available via Google Play and Mac App Store. Smart Receipts lets you track your finances, including receipts, for yourself or your employer. You can choose from default data types including dates, price, tax, receipt categories, comments, and payment methods.

What’s the Best Way to Get Rid of Outdated Tax Documents?

When you do finally toss out your home-related paperwork, use a shredder. Throwing away intact or manually torn documents that include personal financial information could put you at risk for identity theft.

Tax season and year’s end are good times to purge files and toss what you no longer need. That’s often when the spirit of organization moves us.

This article provides general information about tax laws and consequences, but isn’t intended to be relied upon as tax or legal advice applicable to particular transactions or circumstances. Consult a tax professional for such advice.

I read this article HERE. By: Dona DeZube