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Business record retention for property owners

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Jamie Sternberg

Q: How long should a property owner keep business records?

A: The time period to keep records depends on why they are being maintained. Generally records should be retained as long as possible, but at least four years.

There is no single, simple rule establishing the minimum time to retain records. Record retention periods must be determined on a case by case basis, after completing a cost/benefit analysis. The cost to retain the records must be weighed against the likelihood that they will be needed. Think about why the records are being kept. Is there a legal obligation to keep them? Is there a business need for them? Focusing on the issues of greatest concern is an important part of the cost/benefit analysis.

One factor to consider is the applicable time limitations that may apply to claims relating to the records. There are many different time periods that could apply. The "statutes of limitations" that are most likely to apply are as follows:

• Two years for a verbal contract, for an alleged breach of a real estate agent's duty to inspect and disclose, or for personal injury

• Three years for certain real estate broker/agent transaction and trust records and for alleged fraud claims

• Four years for a written contract and for an alleged breach of fiduciary duty

• Up to seven years for some IRS purposes (although some have no limitations)

• Ten years for latent (not immediately noticeable) construction defects

Extensions of these time limitations can exist in different situations. Some of these extensions can be based upon:

• Delays in discovery of injury

• Personal injury claims to people younger than 18 years old

• Cross-complaints and indemnity claims

If the records are needed for tax reasons (to establish basis in property or otherwise), keep the documents for at least as long as you own the property, plus an additional amount of time, preferably six years or more. While generally the IRS must initiate action to collect taxes within three years from the date the tax return is filed, or two years from the date tax is paid, both the IRS and FTB have six years to start legal action if the taxpayer's income is understated by more than 25%. There is no statute of limitations if a taxpayer files a false or fraudulent return or never files a return at all.

Deciding how long to retain business records is a business decision that should be made after considering the applicable laws, the cost of record retention, and the likelihood that the record will be needed.

Property owners who lack physical storage space for records may want to consider scanning and storing hard copy records electronically.

Note that California has many laws to protect the privacy of California residents. These laws specify how information and records are to be maintained and destroyed. Generally, client records containing personal information must be destroyed either by shredding, erasing or otherwise modifying the personal information in the records to make it unreadable or undecipherable. "Personal information" is any information that identifies, relates to, describes, or is capable of being associated with a particular individual, including (but not limited to) name, signature, social security number, physical characteristics or description, address, telephone number, passport number, driver's license or state identification card number, insurance policy number, education, employment, employment history, bank account number, credit card number, debit card number, or any other financial information.

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Kimball, Tirey & St. John LLP specializes in business and real estate law, landlord/tenant, and collections with offices throughout California. This article is informational only and should not be used as legal advice. If you have any questions regarding this article, please call (619) 231-1422.

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