In the coming weeks, the Congress will write taxes and expenses that should include alleviation for many victims of the Eaton palisades and fires. But apart from cash assistance, Governor Gavin Newsom has already asked, the California Congress Delegation should work to include two urgent changes necessary for the tax code in this same legislation. Without this, the reconstruction of areas ravaged by the fire of Los Angeles could take years more.
The internal income code has not been written with massive urban forest fires. By taxing the income of most sales as income, the current tax law encourages many fire victims to hold their prizes now important until death to avoid a huge tax bill. The tax code also discourages potential buyers to buy empty land and build new houses, because they could be penalized for the sale of their current houses. These perverse incentives will considerably slow down the reconstruction process. The way to solve this problem is to modify the way in which tax law applies in the disaster -declared disaster areas.
Our Californian delegation in Washington should find a receptive audience in the congress for this discreet reform, because putting the communities on fire on a stand is not only an act of mercy. It is essential to restore the tax base, for state and federal income.
For the first reform, the congress should exempt victims from the presidential fire disaster areas of income resulting from the reception of the insurance product and the sale of their lots.
Second, to encourage buyers in fire areas, the Congress should allow income taxes on the sale of a main residence, if the sale product is used to buy or build a new main residence in fire areas.
In the Pacific Palisades, where the value of the properties has skyrocketed in recent decades, dozens of owners owned their properties for more than 20 years at the time of fires. Even before the disaster strikes, these residents – many of them – were powerful to keep their property until death. In doing so, they could forever avoid income taxes on the appreciation of their homes.
After the fires, this incentive remains. But its effect has radically changed now that people have been forced to leave their house. Previously, people who stay with them have no particular problem for them or their communities. Now people evacuating their burnt prizes, but continue to keep them in this condition until death creates a big problem. This is the worst possible result for communities – the original residents do not rebuild and do not return, and the new residents do not have the possibility of building and moving.
The tax bill that the victims of fire should face if they were selling is only one to pay, but for the disaster. And it is not only a product of the appreciation of their property over time. Insurance further complicates the image.
Under the current law, the products of reinvested property insurance in a new house are generally tax exempt, but non -reinvested profits are subject to taxes. The fire victims who sell their burned houses and reduce or move to a cheaper area would therefore face a double tax kick.
An elderly couple whose children have long since have moved away would probably have no interest in rebuilding – in particular given the many years it could take to finish construction. For them, the sale and reduction of the workforce makes the most meaning. But not after the taxes taken into account. If they receive a big payment of their owner's insurance, but do not devote it to a new house, and they sell their original property for a large sum, they could face an astounding tax invoice, easily $ 1 million or more. For many, it looks like an insult, coming in the heels to be forced to get out of their house and see almost everything they used to have smoke.
Unfortunately, the simplest way for fire victims to avoid this financial situation is to hold their blackened land until death while buying elsewhere. As long as they reinvest 100% of any insurance product in a new house elsewhere, they can completely avoid these taxes. At the same time, they can borrow against the value of their batch to generate species in tax franchise, using these funds to complete the cost of a smaller house and help pay their lifestyle. Ideal for them, perhaps, but bad for southern California and its tax plate.
The other part of the tax code to be paid concerns buyers in fire areas. For decades, the tax rule was that buyers buying a new main residence for an amount greater than the sale price of their previous residence could postpone any income tax tax. But since 1997, the benefit of this provision has been capped at $ 250,000 ($ 500,000 if it is married). Inflation has further reduced its value: $ 250,000 in 1997 is equivalent to only $ 125,000 today. The restoration of the rule before 1997 for buyers in fire areas will guarantee that there are buyers and sellers. This will return the reinvestment market in these broken communities.
These two reforms constitute a simple justice. Fire victims should not be struck by income taxes that would never have been due differently. The tax code should not encourage them to hold lots damaged by fire for the rest of their lives, to the detriment of the surrounding communities. The implementation of good tax incentives for buyers and sellers will obtain the construction of Altadena, Malibu and Pacific palisades faster and better. And this will in turn regenerate tax revenue for the benefit of Californians and all American taxpayers.
Christopher Cox is a principal researcher in residence in UC Irvine and former president of the American House internal security committee. Hank Adler is a professor of accounting at Chapman University.
