At the closing for your property's sale, you will be buried in an avalanche of paperwork. After you dig yourself out, you'll probably just want to run away from it all. Avoid this temptation: You've got to keep copies of all those papers for the good ol' IRS. Next time you file your taxes, you'll need documentation for the expenses and proceeds of the sale. And even after you file the necessary forms with your tax return, you'll want to hold onto this paperwork in case you're ever audited.
Keep proof of improvements and prior purchases
Whether they help you or hurt you, tax laws all have one thing in common: they're a headache. A perfect example is the law that allows you to add the cost of improvements to your home's cost basis during your years of ownership -- a potentially nice tax break, if you have a sizable capital gain.
The problem is, in order to take advantage of this tax break, you need to save receipts for every dollar you spend on home improvements. And, for as long as you're a homeowner (which can be decades) and continue to defer paying tax on your profits, you have to hang onto these receipts.
We realize that saving all these receipts can seem like an exercise in futility. If you're never audited, your receipts may never see the light of day. In fact, if your house-sale profits fall under the exclusion limits, your adjusted cost basis for tax purposes is a moot point.
But the point of keeping documentation for tax purposes is to anticipate the unexpected; think of it as insurance. Someday, you may sell your house and owe tax on your profits. And, because you never know when one of those dreaded IRS audit letters will land in your mailbox, keep those receipts!