This article is reproduced with permission from Spidell Publishing, Inc.
California conforms to federal law regarding the real estate tax deduction, which is an allowable itemized deduction for both federal and state income tax. California differs from most other states, however, in that many California property tax bills include large special assessments that are not allowable as deductions. In general, the allowable deduction amount is the ad valorem tax, or the amount based on the assessed value of the property. Special assessments included in the property tax bill, such as for Mello-Roos or for various services provided to specific properties, are generally not deductible. This is an important issue because some taxpayers have very large Mello-Roos assessments on their property tax bills.
What is deductible?
Deductible real property taxes are those levied for the general public welfare by the proper taxing authority at the same rate against all property in the territory over which the authority has jurisdiction. Taxes assessed against local benefit of a kind tending to increase the value of the property, such as levies paid for paving, sewers, streets, sidewalks, drainage, and other similar property improvements, are capital investments and are not deductible as taxes.
Taxes allocated to ordinary maintenance and interest charges are deductible, but the regulations provide that the burden is on the taxpayer to show the allocation. Expenses for the operation, planning, organization and administration, costs of engineering and legal services, the office equipment, or the cost of billing are not deductible as maintenance expenses. Deductible maintenance expenses do include, in the case of a water system, for instance, expenses incurred for the repair and maintenance of a purification system, pumping system or distribution system.
Unlike property taxes that are levied for general revenue purposes and apply to all property over which a taxing agency has jurisdiction, benefit assessments (sometimes called “special assessments”) are levied for specific improvements and apply only to property that derives a benefit from the improvements.
Special assessments are not deductible, even though an incidental benefit may inure to the public welfare. However, a decision to the contrary was reached in a General Counsel Memorandum (GCM) dated November 24, 2003, which concluded that deductions for real property taxes are not limited to ad valorem taxes. The GCM concludes that, even though not based on the value of the property, these “special taxes” are still determined by a “like-rate” against all property in the jurisdiction. This means that they may be deductible. The GCM concludes that an analysis of the facts and circumstances of these special taxes may be necessary.
Under this analysis, some Mello-Roos assessments might be deductible. The problem is that the taxpayer is probably not going to be able to determine what the Mello-Roos assessment is being used for. So, although a portion of the Mello-Roos may be tax deductible, finding out how much that is will be a challenge to the most determined taxpayer.
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