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How Long Should You Keep Returns and Records?  Part II

Last month I stated that retaining tax returns indefinitely and important tax return related records for six years after the return is filed should generally be adequate.

Records relating to businesses and property may have to be kept longer. Keep in mind that the tax consequences of a transaction that occurs in one year may depend on things that happened in earlier years and that the period for which you should retain records must be measured from the year in which the tax consequences actually occur. This may be significant, for example, where you sell property, such as real estate, that you bought years earlier and later added improvements. Therefore, records pertaining to the purchase and the improvements should be kept for at least six years after you file the return for the year of sale.

When new property takes the basis of old property, records relating to the old property should be kept until six years after the sale of the new property is reported. For example, suppose you purchased a car for business use in '95 and traded it in on a new car for business use in '98. If you sell the new car in '00, your basis in the new car will determine whether you have a tax gain or a tax loss on the sale. The basis in the new car is determined, at least in part, by your basis in the car you traded in '98. Accordingly, records relating to your old car should be kept until 2007 (i.e., for six years after your '00 return is filed).

Similar considerations apply to other property which is likely to be purchased and sold such as stock in a corporation or mutual fund, bonds, etc. In particular, remember that if you reinvest dividends to purchase additional shares of stock, each reinvestment is a separate purchase of stock, and the records of each reinvestment should be kept for at least six years after the return is filed for the year in which the stock is sold.



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