I just had the good fortune to attend a taxation seminar hosted by registered advisor Jason Lowther of Western International Securities. The main speaker was Bill Exeter of Exeter 1031 Exchange Services.
It turns out Google is not correct when it says insurance proceeds are not taxable. This may be true when talking about contents coverage or alternative living expense, but the IRS does believe that any portion of your settlement that reimburses you for what would have been a long-term capital gain is taxable if it is not reinvested in rebuilding the damaged property. That is why the 1033 Involuntary Conversion rules were created.Â
A 1033 exchange is more liberal in many ways. It allows you to reinvest in a new principal residence within two (or four) years, depending on who you talk to. The new residence must be of equal or greater value, but there is no requirement that the previous ratio of debt to equity must be maintained.Â
Mr. Exeter and Mr. Lowther also discussed several other strategies for financial survival from a disaster. The options are many and depend upon your individual situation. Please discuss the above information and any other options you are considering with your CPA and/or tax attorney.
I have concluded that the 1033 option is wonderful for those who wanted to move anyway due to different housing needs as they have aged in place.
For most families, rebuilding your previous square footage plus 10 percent as allowed by the city and county is the preferable option due to the accelerated permit processing that should put a permit in your hand within approximately six months from the first application. Get started on your application now! If you should change your mind, the work and reports you generated toward the goal of rebuilding will make your lot more valuable.
Bad news
The city council at their meeting of Feb. 25, 2019, had a discussion of neighborhood character and coastal development permits (item 5A on the agenda if you would like to review the video on the city’s website). As a result of the discussion and vote, an ordinance is being drafted reducing the upper limit for the largest home that could be built in Malibu from 11,000 sq. ft. to 8,500 sq. ft. Smaller properties would also see their upper limits reduced and the new size curve will be generated. At Rick Mullen’s urging, they decided to further reduce everyone’s buildout to 75 percent of the already reduced new curve, or 110 percent of the average size of other homes within 500 feet, whichever is greater.Â
Mayor Pro Tem Karen Farrer was the only council person to not vote in favor of this abomination.Â
If this new ordinance is approved by the planning commission and then the city council, it is difficult to imagine any permit that will not require an expensive and unpleasant ordeal as you are forced to defend your remodel or rebuild in front of the always obnoxious planning commission. The possible reduction in buildout size will reduce the value of your fire rebuild lot if your buyer wants to build something larger than the +10 percent the current ordinance entitles you to. Stay tuned.