In the coming weeks, Congress will write fiscal legislation and expenses that should include relief for many victims of Palisades and Eaton fires. But apart from cash assistance, Governor Gavin Newsom has already requested, the delegation of the California Congress should work to include two changes necessary urgently to the Tax Code in that same legislation. Without these, the reconstruction of the areas devastated by Los Angeles fire could take more years.
The internal tax code was not written with massive urban forest fires in mind. By taxing the income of most sales as income, the current fiscal law encourages many fire victims to maintain their lots now empty until death to avoid a large fiscal invoice. The Tax Code also discourages potential buyers to buy empty lots and build new homes because they could be penalized for selling their current houses. These perverse incentives will drastically delay the reconstruction process. The way to solve this is to change the way in which the tax law is applied in the disaster areas declared presidentially.
Our California delegation in Washington should find a receptive hearing in Congress for this discreet reform, because recovering the communities of standing is not just an act of mercy. It is essential to restore the tax base, both for state and federal income.
For the first reform, the Congress should exempt victims in the areas of presidential fire disaster of income taxes resulting from the receipt of insurance income and the sale of their lots.
Secondly, to encourage buyers in fire areas, Congress must allow the postponement of income taxes on the sale of a main residence, if the income of the sale is used to buy or build a new main residence in the fire areas.
In Pacific Palisades, where the values of the properties have shot themselves in recent decades, dozens of owners had owned their properties for more than 20 years at the time of fires. Even before the disaster hit, these residents, many of them elderly, had a powerful incentive to retain their properties to death. In doing so, they could forever avoid income taxes on the appreciation of their homes.
After the fires, that incentive remains. But its effect has changed dramatically now that people have been forced to leave their homes. Previously, people who stayed in their own homes did not present particular problems for them or their communities. Now, the people who evacuated their burned lots, but continue to cling to them in that condition until death creates a big problem. It is the worst possible result for communities: original residents who do not rebuild and return, and new residents have no opportunities to build and move.
The tax invoice that fire victims would face if they sell is one that they have never had to pay, but for the disaster. And it is not just a product of the appreciation of your property over time. Insurance further complicates the image.
According to the current law, re -founded property insurance income in a new home is generally free of taxes, but non -reinvest income is subject to taxes. Fire victims who sell their houses burned and reduce size or move to a less expensive area, therefore, would face a double tax.
An elderly couple whose children have moved for a long time will probably have no interest in reconstruction, especially given the many years that the construction can be completed. For them, selling and reducing the size has the most practical sense. But not after taxes are taken into account. If they receive a great payment of their owner's insurance, but do not dedicate it to a new house, and sell their original property for a large sum, they could face an amazing income tax bill, easily $ 1 million or more. For many, this feels like an insult, immediately arriving from being forced to get out of their home and see that almost everything they had once put into smoke.
Unfortunately, the easiest way for fire victims to avoid this financial situation is to maintain their blackened lots until death while buying elsewhere. While they reinforce 100% of insurance income in a new home elsewhere, they can completely avoid these taxes. At the same time, they can borrow against the value of their lot to generate tax -free cash, using these funds to complement the cost of a smaller house and help pay their life expenses. Ideal for them, perhaps, but bad for southern California and their tax base.
The other part of the Tax Code that will be addressed refers to buyers in fire areas. For decades, the fiscal rule was that buyers who buy a new main residence for an amount greater than the sale price of their previous residence could defer any income tax of the move. But since 1997, the benefit of that provision has been limited to $ 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. Restoring the prior rule to 1997 for buyers in fire areas will ensure that there are buyers and vendors. That will invigorate the reinvestment market in these shattered communities.
These two reforms are equivalent to simple justice. Fire victims should not be beaten with income taxes that would never have owed themselves. The Tax Code should not encourage them to maintain lots damaged by fire for the rest of their lives, at the expense of the surrounding communities. Put in place the correct tax incentives for both buyers and sellers will get Altadena, Malibu and Pacific Palisades built faster and better. And this in turn will regenerate tax revenues for the benefit of Californians and all US taxpayers.
Christopher Cox is a senior scholar in Residence at UC Irvine and former president of the National Security Committee of the US House of Representatives. Uu. Hank Adler is an accounting professor at the University of Chapman.
