Know When to Retire Your Records

Learn the record-keeping requirements of the IRS and your state to minimize liability when you retire from your career in real estate.

February 1, 2004

When Tom Grant Jr. began to clear out his office for retirement, the commercial real estate broker began to research what records he needed to keep, and which could safely be thrown away.

Grant, who was president of the NATIONAL ASSOCIATION OF REALTORS® in 1978, officially closed his Tulsa, Okla., brokerage in May, but actually started consolidating records six years earlier, in anticipation of retirement.

"Most of the things you learn as a real estate practitioner are how to build your business, keep business, and recruit more business," says Grant. "No one teaches you about things having to do with contraction, like retirement. I've been involved with ownership for more than 40 years, and still have to service the properties my family's still involved with.

"I've had calls in the past where estates have lost their records, and they needed to establish the cost of sales for tax reasons. There were fires or deaths, and I was one of the sources they'd go to. So the questions I had were about any responsibilities as a real estate professional with record keeping."

For tax purposes, whether you're a broker or a salesperson, there are two important sources of information on record keeping to check with before retiring—your accountant and the Internal Revenue Service.

For the Broker

There are two types of records that brokers who own their own businesses should keep track of—1) any documentation related to personal income tax returns, and 2) any paperwork related to employee taxes and business filings.

"We advise clients to keep their personal returns forever, in case of an audit, and the supporting material for seven years (to cover the length of time an audit most likely would occur)," says Michael J. Alexander, a certified public accountant with Alexander & Hemlock in Lapeer, Mich. "Records from any transaction that is still open at the time of retirement should be kept as well."

In general, you should hold onto records that support an item of income or deduction on a return until the period of limitations for that return runs out. The period of limitations is the length of time in which you can amend a return to claim a credit or refund, or the IRS can assess additional tax.

In most cases, personal or business tax returns may be audited by the IRS up to three years from the date you filed the original return. However, the reason that most experts recommend that you keep the returns indefinitely is because the IRS can determine at any time that a return is false, or fraudulent with the intent to evade tax, and therefore order an audit.

Alexander recommends the following:

Closing agreements—Contact clients, tell them you're retiring and closing down your office, and give them an opportunity to get any records from you. Tell them if they don't retrieve the records before a certain deadline, you will be destroying the documents.

If you're retiring, but the office will remain open, records for open transactions should be turned over to the new owner.

  • Tax returns for your company—Keep indefinitely, in case of audits.
  • General ledgers—Keep indefinitely. You always should have original documentation for audits.
  • Employee tax records—Keep at least four years after the date the tax becomes due or is paid, whichever is later.
  • Supporting material—Keep at least seven years.

Supporting material for income documentation includes such items as cash register receipts, bank deposit slips, bank statements, receipt books, invoices, and credit card charge slips.

Supporting material for the expenses you claim to carry on business include canceled checks, cash register tapes, account statements, credit card sales slips, invoices, and petty cash slips for small cash payments.

  • Expired contracts and leases—Keep at least seven years.
  • Correspondence on legal and important matters—Keep indefinitely.
  • IRS audit reports—Keep indefinitely.

Eric Smith, senior tax specialist in the small business/self employed division of the IRS, says a broker who sells the building that houses his or her realty office should keep records documenting the cost basis of the sale, improvements made to the building over the years, and depreciation taken over the years.

Records to figure the annual depreciation of assets, and the gain or loss when you sell the assets should be kept. Such records should show information such as:

  • When and how you acquired the asset
  • Purchase price
  • Deductions taken for casualty losses, such as losses resulting from fires or storms
  • How you used the asset
  • Selling price
  • Expenses of sale

“When it comes to selling the business itself, there are a few different methods used to evaluate the worth of the business, including the goodwill involved, client contacts, and any cost basis for establishing the business,” Smith says. “I've seen cases where the purchase price isn't fixed, but is based on the first year's income to the new owner. It's best if the valuation for the business is broken down. Brokers should keep those records three years after selling.”

According to IRS requirements, your record-keeping system should include a summary of all business transactions, usually made in accounting journals and ledgers. For most small real estate offices, the business checkbook is the main source for entries.

For the Salesperson

Salespeople should maintain records related to personal income tax returns, and as a courtesy to clients, offer to turn over any applicable paperwork to them.

  • Closing agreements—Contact clients, tell them you're retiring, and give them an opportunity to get any records from you, or arrange to store the documents with your broker. Paperwork for any open transactions should be left with the company.
  • Supporting material—Keep at least seven years.
  • Supporting material for income documentation include cash register receipts, bank deposit slips, bank statements, receipt books, invoices, credit card charge slips and Forms 1099-MISC.
  • Supporting material for the expenses you claim to conduct business include canceled checks, cash register tapes, account statements, credit card sales slips, and invoices.
  • Expired contracts and leases—Keep at least seven years.
  • Correspondence on legal and important matters—Keep indefinitely.
  • IRS audit reports—Keep indefinitely.

Other Record-Keeping Requirements

For both brokers and salespeople, computer software packages can be used for record keeping, but you must be able to produce sufficient paper records to support and verify entries in the event of an audit.

You also must have documentation to show that the computerized portion of your record-keeping system has items such as:

  • Controls used to ensure accurate and reliable processing
  • Controls used to prevent the unauthorized addition, alteration, or deletion of retained records
  • Charts of accounts and detailed account descriptions

"Everyone who is self-employed—brokers and salespeople—makes estimated tax payments while working," Smith says. "When someone retires, they've usually set up an IRA, Keogh, or SEP Plan. As they're drawing out the retirement income, there's no federal tax withheld, so they still need, in most cases, to make estimated tax payments.

"In some cases, they may not have been able to deduct money put into IRAs, and those dollars are not taxed,” Smith says. “Roth IRA distributions also are not taxable."

When your records are no longer needed for tax purposes, the IRS recommends checking with insurance companies or creditors before discarding paperwork in case others require you to keep records longer than the IRS does.

In addition to federal IRS requirements, state governments usually have record-keeping requirements as well. Licensing authorities in a number of the larger states—including California, New York, Illinois, Florida, and Texas—generally have the most stringent laws, which often follow IRS requirements.

"The retirement issue is really irrelevant," says Tom Pool, spokesperson for the California Department of Real Estate. "California law says a broker is required to maintain records for three years from the closing of the transaction, or date on the listing contract on deals that fall through. My general advice is to keep records for four years. There also are certain mortgage loan disclosures that need to be kept for four years if the broker handles loans."

Pool says brokers who retire should make sure that they don't leave their associates in the lurch, as salespeople can’t continue to conduct business without a new broker to sponsor them.

June Barlow, vice president and general counsel of the CALIFORNIA ASSOCIATION OF REALTORS®, says record keeping is really an individual decision that's a matter of risk analysis. In other words, how much risk are you personally comfortable taking? If you’re not very comfortable with risk, keep the records longer than are required by the IRS and your state.

"Most negligence laws have a one- or two-year statute of limitations," says Barlow. "If there's a fraud claim, it can be from the date of discovery. So you want to cover yourself. But there's nothing in the law differentiating the need for record keeping when you're retiring or selling a business from any other time."

Additional Resources

For more information on record keeping, check out these organizations and their Web sites.

National Association of Real Estate Licensing Officials
Gives a state-by-state list of real estate regulatory agencies that can give you information on your state's record-keeping requirements.

Internal Revenue Service (the following documents are PDF files)

Notice: The information on this page may not be current. The archive is a collection of content previously published on one or more NAR web properties. Archive pages are not updated and may no longer be accurate. Users must independently verify the accuracy and currency of the information found here. The National Association of REALTORS® disclaims all liability for any loss or injury resulting from the use of the information or data found on this page.

Related