Taxes are another ball in the air which, if you don’t watch carefully, can land right on you. Two types are relevant: income taxes and property taxes. Income tax possibilities include gains, losses, or neither. Tax gains can cost you money; tax losses can save you money. You may have neither, but you better know which group you’re in. Calculating gains and losses starts with your basis, which for most people, is what they paid for their home, plus improvements. Your insurance proceeds may be taxable. You have a gain if your insurance proceeds are more than your basis. You have to report gain in the year you get it, but you can postpone paying the tax on it for up to 4 years for your personal residence. If you replace your home within 4 years, you may avoid having to pay tax at all. You may also be able to exclude $250,000 of the gain ($500,000 for married couples) if you qualify to exclude gain generally based on how long you lived in and owned your home. All of this applies to personal residences. For rentals, the replacement period is 2 years, and for personal property there are no tax gains to worry about. Losses, known as casualty losses for fire victims, are the difference between the expected insurance and other compensation you get and your basis or the decrease in value of your property (whichever is less), with some other limitations. You do get to include losses on personal property in calculating your total casualty loss. If you have a loss, you can protect other income from taxes. You can even carry losses back to prior years and get refunds and carry losses forward to protect future income from taxes. This is a little bit tricky, so talk to a CPA or another tax professional to understand whether you have a gain and loss.
Then there are property taxes. Your property burned down, but yes, you still owe property taxes. Counties will drop property taxes for structures that were lost, but not for the land portion of your bill. Normally, when you do new construction, the cost of construction is added to your assessed value and your property taxes go up, but things are different for fire victims who rebuild. If you rebuild a similar structure on the same property, the county assessor will allow you to keep your old assessed value, which means you will have new construction with your old property tax bill, which might be very low. Nice, but what is a similar structure? It’s something that doesn’t exceed the square footage of the old structure and is of similar construction quality in the eyes of the assessor. If you build something bigger, or in a higher construction quality category, your property tax bill will increase. Check with your county assessor before you build.
You can also take your old assessed value with you elsewhere. If you replace your home in the same county and the market value of the new property is not more than the market value of the old property before the fire, then you can transfer your old assessed value to the new property. So, in this case, your property taxes will be the same as they would have been on the old property if there had been no fire. You can also transfer your assessed value to replacement properties in some other counties. A few counties in California will allow you to purchase property there and will assess those new properties not at the new purchase price, but will allow fire victims to transfer their old assessed values to the new properties. Those counties include Sonoma, San Francisco, Los Angeles, and some others. So, here we see tax issues impacting the rebuild or replace question. As you can see, taxes are something else to keep track of.