Hat tip to ProfHoff for sending in this update from sfgate.com:
Many California homeowners may be surprised to learn that some charges on their property tax bills are not deductible on their income tax return.
The Franchise Tax Board is on a mission to get California homeowners to follow the law and stop deducting the entire amount of their property tax payment. Increasing compliance would raise money for the state and federal government.
(Reminder: California homeowners must pay the first half of their 2011-12 property tax payment by Dec. 10 to avoid penalties.)
Tax pros say the vast majority of homeowners deduct their entire property tax payment as an itemized deduction on their federal tax return, even though federal law prohibits deducting certain taxes and fees. Taking the full deduction reduces state as well as federal taxes.
To be deductible, a property tax must be a percentage of the home’s assessed value (known as an ad valorem tax). It also must be imposed uniformly throughout the community and benefit the general community or government.
Any tax that is a flat fee per household or an itemized charge for services assessed against specific property or certain people is not deductible. Nondeductible charges might be identified as Mello-Roos or Community Facilities Districts, 1915 assessment district bonds, lighting and landscape, parcel taxes, school or college measures and bonds, water, sewer, flood, police, fire and libraries, the tax board says on its website.
Property tax bills do not break out which charges are and are not deductible. In many cases, it’s hard to even decipher what the charges are.
Nevertheless, the tax board told tax preparers in September that it was going to add three lines to 2011 California income tax returns asking homeowners for their parcel number, the amount of property taxes paid and the nondeductible amount.
After getting many complaints from the tax community, the board decided in mid-November to postpone these changes until 2012 tax returns and in the meantime try to educate homeowners about the issue.
Nothing in writing
“Our concern was that it’s very difficult sometimes to tell what is and is not deductible,” says Lynn Freer, president of Spidell Publishing, a tax information service. “They did this without really getting information from the IRS, in writing, as to whether or not Mello-Roos taxes are deductible. They generally probably are not, but sometimes they may be. There was never a written ruling on that.”
Mello-Roos taxes finance schools and infrastructure improvements in many communities in the state. They can add thousands of dollars to property tax bills.
In its instructions for Schedule A, Itemized Deductions, the IRS tries to explain which real estate taxes are and are not deductible. The IRS has not been cracking down on this issue because it mainly affects California taxpayers.
In most states, property tax bills are fairly straightforward and mostly deductible. That’s because most states can increase property tax revenue by raising the rate or reassessing properties on a regular basis. This results in higher ad valorem taxes, which are usually deductible.
But Proposition 13 strictly limits increases in general property tax revenue in California. Communities that want to raise revenue must pass parcel or other types of taxes that are often nondeductible.
Potential revenue
The IRS “is licking its chops” over the potential federal revenue the state tax board’s move could generate, Freer says. “Whatever you owe the state, you will owe about three times that amount to the IRS.”
She adds that this is not an issue for people who are subject to alternative minimum tax because they don’t get the benefit of property tax deductions.
The tax board will launch an educational campaign in January and hope more taxpayers will comply voluntarily with the rules. It has posted guidance for taxpayers at sfg.ly/rHNwOA.
Some counties have posted sample tax bills on this Web page that identify some charges that are and are not deductible, but the samples do not show all charge on a homeowner’s property tax bill.
Some years ago, the Department of Motor Vehicles began showing drivers on their registration renewal notices which part of their bill – the vehicle license fee – is tax deductible. “The (fee) is tax-deductible since it is based on your car’s value,” says Richard Pon, a San Francisco CPA. The DMV also has a Web page where taxpayers can look this up at sfg.ly/s9BkBX.
Nobody likes paying more taxes, but if the tax board wants to increase compliance, it should persuade county tax collectors to do something similar.
Read more:
http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2011/11/23/BU5Q1M3HP5.DTL#ixzz1ehDVm15n
Another reason to hate MR’s.
Oh, and let’s not forget that a lot of people have deducted the full interest on their seconds, when equity loans are only eligible for the first $100K borrowed and not under all circumstances.
Pretty soon, they will tax the air you breath.
I go to a very good CPA and he always takes the full property tax amount as a deduction.
How does the saying go? Oh yeah, easier to ask for forgiveness than get permission? Until they start sharing information with the state and feds electronically I am not going to lose a lot of sleep over it.
“Oh, and let’s not forget that a lot of people have deducted the full interest on their seconds, when equity loans are only eligible for the first $100K borrowed”
If the equity loan was used to improve the house, the $100k limit does not apply. All of the interest is tax-deductible.
The whole mello-roos thing is joke. It’s a tax! I have to pay it. It pays for all the stuff that property tax is suppose to cover. It exists to make-up for the insanity of prop 13.
Now that the state is strapped for cash they’re trying to suck revenue out of every place possible. Hey here’s a thought: how about repealing prop 13 and all mello roos and then develop a reasonable property tax formula to address the legitimate problem of people being taxed out of their homes as values rise while not requiring that new home owners pay for the majority of the roads and schools. Not politically viable? Fine, but then I’m going to deduct every friggin’ penny of the mello roos.
I’m already paying the taxes for hundreds of home owners who aren’t paying their fair share just because they bought their houses long ago. I’ll be damned if I’m going to pay even more tax on top of that.
Dude – You are incorrect. MR does NOT pay for things covered by property tax.
It its simplest terms, the developer borrows money to cover a big portion of his upfront infrastructure cost for the development which they used to pay for with cash. These funds cover the cost of sewer, streets, parks, etc…all of which are requirements to build the development.
Now that they have borrowed these funds, the people who loaned the funds want to get repaid. So, they decided to make the loan (or bonds) as payable NOT by the developer, but rather by the homeowner…with interest. To ensure payment, they ‘secure’ the loan by attaching it to the tax bill for collection.
Thus, the tax collector is simply a bill payment processor for a fee, in addition to collecting taxes.
In conclusion, the developer gets away with shifting much of the infrastructure cost/risk to bondholders and has to bring much less equity to the development project. He then concludes that he can sell the property for a lower price point (in theory) since he does not need to recapture the MR bond amount in his sale price. That is factored into the monthly payment mentality.
Lsstly, its the landowner who makes out best as he is able to sell his land for $X + 80%+/- of the mello roos bond amount leaving the spread for the developer. Perhaps that is a bit too much ‘developer speak’ but the landowner profits, developer profits, lender profits, homeowner overpays.
But it is NOT PROPERTY TAXES. However, I would think you should be allowed to write off the interest component of the MR amount.
@Dude,
I live in California and I bought my home in 1987. My house is currently assessed at ~150% of what I paid for it so my taxes have also gone up under Prop. 13. I happen to live in an area of California badly hit by the mortgage bust (Sacramento County) and guess what? If prices go any lower in my ‘hood, I’ll be petitioning the tax assessor to lower the assessed value on my house for a reduction in my property taxes. Be thankful your house is still worth something and if it’s not, then you have recourse to petition your county tax assessor for property tax relief.
Clearfund you are wrong, MR isn’t only from developers, where I live we have thousands of dollars in MR taxes that are NOT from developers. They are also done when the people decide to issue a bond to pay for something, that bond can be tied a MR tax.
Agree 100% with dude. Repeal prop 13 and make evreyone pay their fair share. How can people who use the same sewers and the same schools pay $2000 /month less than someone else with the exact same house. Its completely bogus and just creates a massive burden for people who didn’t know about the tax in the first place.