Upcoming tax and spending legislation is being crafted by Congress to aid victims of the Palisades and Eaton fires. Beyond cash assistance requested by Governor Gavin Newsom, necessary reforms to the tax code could expedite rebuilding efforts. Current IRS rules disincentivize the sale of fire-affected properties and hinder rebuilding. Key reforms include exempting insurance proceeds and lot sales from income taxes and allowing tax deferral for selling a principal residence if proceeds are reinvested in fire-affected areas. These changes are vital for both community recovery and restoring tax revenue.
The Internal Revenue Code was not written with massive urban wildfires in mind, encouraging fire victims to hold empty lots until death to avoid a huge tax bill.
Congress should exempt victims in presidentially declared fire disaster areas from income taxes resulting from the receipt of insurance proceeds and the sale of their lots.
To support rebuilding, Congress should allow deferral of income taxes on the sale of a principal residence when proceeds are used to buy or build in fire-affected areas.
Restoring fire-gutted communities isn't just an act of mercy; it's essential to restoring the tax base, crucial for state and federal revenue.
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