In order to reap all your tax benefits from buying, selling or investing in a home, careful record-keeping year-round is a must. You should keep all records from the date you acquire the property until no less than seven years after you sell it. (In fact, the IRS can audit you even further back if they can prove you committed tax fraud.)
Your settlement sheet is especially important -- it is an excellent record of your home's initial worth and it documents deductible settlement expenses such as "discount points" you paid to the lender, any prepaid property taxes you credited back to the seller and any initial loan interest payments you made at settlement.
You should also keep proof of payment on items such as legal fees, title insurance, recordation and transfer tax fees and closing costs. Plus, you'll need to document any home improvements you have made (keeping receipts), as many of these costs will reduce your taxable gain on sale.
In addition, old tax returns should be retained permanently as they are often reviewed by creditors or mortgage lenders to determine income history. To find out more about record-retention requirements, contact your professional tax advisor.