Jan262012
Attention Irvine home owners: your Mello Roos are no longer tax deductible
The Community Facilities District Act (more commonly known as Mello-Roos) was a law enacted by the California State Legislature in 1982. The name Mello-Roos comes from its co-authors, Senator Henry J. Mello (D-Watsonville) and Assemblyman Mike Roos (D-Los Angeles). The Act enabled “Community Facilities Districts” (CFDs) to be established by local government agencies as a means of obtaining community funding.
When California Proposition 13 passed in 1978, it restricted the ability of local governments to raise property taxes by more than an inflation factor. The budget for services and for the construction of public facilities therefore could not continue unabated. As a result, new ways to fund public improvements in respective locales were considered. The Mello-Roos fees are generally considered an end-run around Prop 13, which caps property taxes while Mello-Roos are not capped.
A Mello-Roos District is an area where a special property tax on real estate, in addition to the normal property tax, is imposed on those real property owners within a Community Facilities District. These districts seek public financing through the sale of bonds for the purpose of financing public improvements and services.These services may include streets, water, sewage and drainage, electricity, infrastructure, schools, parks and police protection to newly developing areas. The tax paid is used to make the payments of principal and interest on the bonds.
Mello-Roos is not tax deductible.
Irvine projects since 1982 have included Mello Roos taxes. Many of the newer communities have very high Mello Roos taxes. Although these taxes have never been income tax deductible, most claim the deduction anyway. The State of California is putting everyone on notice, you better stop taking this deduction.
Editorial: Bad news for many homeowners
State cracking down on income-tax deductions for Mello-Roos fees.
Published: Jan. 9, 2012 Updated: Jan. 10, 2012 3:25 p.m. — OC Register
Happy New Year. A tax many California property owners have not been paying now is going to be demanded of them by the Franchise Tax Board.
It concerns special assessments for vector control, mosquito abatement and water fees that almost everybody pays. But it mainly concerns property subject to Mello-Roos fees, special assessments created in 1982 to fund improvements and infrastructure in newer communities and which are not subject to Proposition 13’s limits on property taxes.
An example in a Jan. 9 article in the Register by Mary Ann Milbourn concerned a total property tax bill of $12,004 for 2011-12. Of that, the small fees amounted to $17. But the Mello-Roos fees were $4,776, or 40 percent of the total.
Until now, the Franchise Tax Board has allowed an entire property-tax bill, including the special assessments, to be deducted from state income tax. However, Ms. Milbourn reported, “Beginning with the 2012 tax bill (the one due in April 2013), the state Franchise Tax Board will require property owners to break down their property taxes into deductible and nondeductible portions.
“In Orange County, 181,550 of the county’s approximately 900,000 parcels were subject to Mello-Roos in the 2011-2012 tax year, according to the Auditor-Controller’s office. They were billed a total of $207.8 million.”
It will depend on the property owner’s state income-tax bracket, which tops out at 10.3 percent, but assuming an effective average rate of 6 percent, the additional tax on that $207.8 million would be another $12 million taken from Orange County taxpayers. Statewide, the total would be something like $140 million.
The bulk of that money will be coming from South County where there are more newer neighborhoods and particularly Irvine where Mello Roos taxes are quite high.
The FTB’s reasoning is that Mello-Roos and other fees never were exempted from the state income tax. Ms. Milbourn reported, “Until now the Franchise Tax Board didn’t to go after them. A new computer system being installed this year, however, will allow the agency to distinguish the portions of property tax bills that are deductible and nondeductible, said Daniel Tahara, a FTB spokesman.”
This will be a good investment for the State. They spent money on an upgrade which will now allow them to collect a tax they previously used to miss. 
Nothing doing, Jon Coupal told us; he’s president of the Howard Jarvis Taxpayers Association. “We need to clarify legislation before they do that,” he told us. “They ought to be thinking about reducing taxes, not increasing taxes. With as many upside-down homes as there are in California, you would think they would not make homeownership more expensive. It demonstrates the avarice of state government.”
That’s great rhetoric. California is desperate for cash, and squeezing a few extra bucks out of homeowners is either avarice or survival depending on your point of view. By making home ownership more expensive, they will ultimately make prices fall further.
Indeed, the Register’s Jonathan Lansner reported Jan. 8 that, for the 22 business days ending Dec. 20, the median selling price for a house in Orange County dropped 5.5 percent from the previous year. Condo prices were down 8.2 percent. And total residence sales were down 5.4 percent.
Because this new tax won’t have to be paid for 15 months, there’s plenty of time to rectify the situation. The FTB should reverse itself. If not, the California Legislature should clarify that the fees are deductible.
If those things don’t happen, there could be a court fight. “Taxpayers have a legitimate claim under existing law to make these deductions,” Mr. Coupal insisted.
No. These taxes were never tax deductible, and the Franchise tax board has issued clear rules on the subject.
As to court action, he said, “We would consider it. If they move forward, then we will consider legal options.”
Just two months ago, a unanimous California Supreme Court ruled, in a case concerning the county of Orange, that “an implied contract under California law” mandated that benefits to retired public employees could not be cut. How can that be different from an “implied contract under California law” involving a tax deduction taken by homeowners for three decades?
Or do public employees have more rights than taxpayers? We soon will find out.
Interesting argument. Since they never enforced the law, they now lose the right of enforcement. It will be interesting to see how the courts rule on that one. In the meantime, prepare yourself to pay more in state taxes as the Mello Roos deduction goes away.
Say goodbye to those supposed affordability gains; heavy new taxes are coming and asset holders, especially the illiquid type, are ideal tax-donkeys.
Also, the sweet spot for the US macro cost structure is oil (bbl) trading within a $45-65 range. At $100, imbalances are everywhere you look. Expect broadbased household input costs to surge.
“Also, the sweet spot for the US macro cost structure is oil (bbl) trading within a $45-65 range. At $100, imbalances are everywhere you look. Expect broadbased household input costs to surge.”
Have you noticed how many mainstream economists keep saying that “inflation isn’t a problem right now”? It makes me wonder where these guys get their information from when even the official numbers show that we had average 3.5% inflation for the last 9 months of 2011.
http://inflationdata.com/inflation/Inflation_Rate/CurrentInflation.asp
This means the true rate is probably somewhere between 5-7%. Anybody that has shopped for groceries in the past year knows this to be the case. The only thing I can figure is that mainstream economists get their cue from the Fed. If Bernank says inflation isnt a concern, then it must be true…
I’ve said all along that the Fed was going to let inflation go higher than historic norms as one means to erase housing and other debt. That’s one reason it makes sense to buy real estate that will rise in nominal terms, while the value of the mortgage debt backing it is devalued in real terms.
The government is literally paying us to buy homes right now.
Mainstream economists are downplaying inflation because they’re looking at CPI, but CPI is designed to suppress/hide it.
Forget about your rising in nominal terms.
It’s all about maintaining the petro$/hegemony muchacho. Everything else is just noise. USD is backed by oil and that relationship is backed by the US military. USD has lost about 35% of its value just since 2001. As a result, the petro$ system is being subverted by other Sovereigns. Any further substantial weakness puts the entire petro$ system at risk.
I like milk on my breakfast cereal.
I know all about the butter shortage in Norway, but this idea that a gallon of milk cost $3.26 in 2010 and in January 2012 $3.57/gallon, com on, that’s a 9.5% increase. WTF?
And in 1995? $2.48/gallon.
There’s no way that milke production/supply is down.
Inflation, man.
I’m so pissed off in the morning.
“I’ve said all along that the Fed was going to let inflation go higher than historic norms as one means to erase housing and other debt. That’s one reason it makes sense to buy real estate that will rise in nominal terms, while the value of the mortgage debt backing it is devalued in real terms.
The government is literally paying us to buy homes right now.”
That’s one of the reason I am buying distressed assets in Las Vegas. Even 5% investor debt will be largely wiped out by inflation in the years to come. And with some of the properties having section 8 tenants, the government literally is paying me to buy homes.
“And with some of the properties having section 8 tenants, the government literally is paying me to buy homes.”
Ha!
Shouldn’t the govt paying people literally to buy homes be a huge RED FLAG?
Those who think debt will be wiped-out by further inflation are going to be in for a rude awakening.
-At this point, if mass inflation occurs, the money dies
If the money dies, it’s the end. The petro$ system will be history, politicians will cede their power, pensions and other self-interests.
-If mass deflation occurs, the economy dies
If the economy dies, politicians will still cede their power, but pensions and other self-interests will remain in-tact and the value of their income streams will rise.
Also, the-powers-that-be hold vast quantities of bonds at 0% and the only way to earn a return at 0% is by currency appreciation.
They know this and will never let the money die.
I think we will see inflation as the end game. When all other avenues have been exhausted, they will print money until the deflation stops.
The Mortgage Police cometh
Although I love to see Mozilo in jail with Madoff and Bernanke selling oranges on a 55 freeway off ramp, shouldn’t we be concentrating on 1) restricting the Fed’s war against my parent’s retirement savings 2) Real regulation against To Big To Fail, and 3) start the process to privatize Fannie Mae and Freddie Mac
more
I called a city official about the CFD in the area we used to live and asked what these are for. He told me it was a fee to help pay for infrastructure such as roads and school in the local area. What I didn’t understand was why the new homeowners were “paying” for a school which was built 30 years prior and why none of the homes built in the mid ’90s were assessed Mello Roos, even though there was much less infrastructure when those homes were built. He said he would look into it and call me back. Well he did in fact call me back but his explanation was ridiculous. He said that in the ’90s, when the houses in the area were ~$150k, the builders paid for the infrastructure and thus there were no Mello Roos on those houses. Then in the early 2000s, the city assessed Mello Roos on the houses as builders didn’t want to pay for the infrastructure so they could keep housing costs down. I doubt this was the case, but it’s maginally possible. So I asked why home prices were no longer affordable but the Mello Roos fees were still being assessed and he actually came clean and said that the city is now using Mello Roos from one community to pay for infrastructure on the next one. He actually admitted to the city run ponzi scheme also known as Mello Roos.
Fortunately I no longer live in that neighborhood and have since bought in a neighborhood with low taxes and no Mello Roos. Couldn’t be happier about my decision.
“he actually came clean and said that the city is now using Mello Roos from one community to pay for infrastructure on the next one. He actually admitted to the city run ponzi scheme also known as Mello Roos.”
Cities commission expensive nexus studies (direct connection basis) to attempt to justify their fees which get rolled into Mello Roos taxes, but everyone knows they are merely finding cover for diverting money from new construction to pay for parks and improvements in old neighborhoods.
We’re not talking about a ton of money here (9%-10% on a few thousand in Mello Roos for most people). This will also be challenged – likely by attorneys who own expensive homes and will pay the most. I would love to hear the state argue that this really isn’t a “property tax.” It’ll probably sound similar to Gingrich arguing he really wasn’t a lobbyist for Freddie Mac.
Anyway, in one of the many scenarios I run every year, I remove Mello Roos from my taxes to see the effect. Because of AMT, the IRS liability is unchanged but the FTB liability increases a few hundred dollars.
As I recall, you live in Columbus Grove which has relatively high Mello Roos. If it only impacts your taxes a small amount, perhaps this is a tempest in a teapot.
We live in Columbus Square with high Mello Roos (~$3,400 annually for us).
Reality of real estate agents reflects housing pain
http://www.housingwire.com/2012/01/25/reality-of-real-estate-agents-reflects-housing-pain
Wednesday, January 25th, 2012, 12:53 pm
The next time you see a well-dressed, smiling real estate agent glaring at you from an advertising board, remember the carefree persona these days is likely only a mirage.
Look deeper and you will find agents and brokers facing a tsunami of negative economic factors, including low housing demand, uncertainty over the regulatory landscape, reluctant young buyers, buyers who can’t qualify for mortgages, homeowners who are underwater and a general sense that the housing bust left them bruised and battered with nowhere to turn.
“The reason we conducted this survey was to find out how the recession has specifically impacted the personal situations and finances of agents and brokers directly, and to tell their stories,” said Paula DeLaurentis, CMO of Entitle Direct. “Everyone asks them questions about the real estate industry, but nobody has asked them about their own personal economic situations. Our survey shows that both personally and professionally, they have had to make significant sacrifices to adapt to the new environment.”
Still, the public perception of brokers and agents is based on their smiley, go-getter image. While they maintain that front on the real estate scene, they are more pessimistic off-the-record.
When the survey questionnaires asked agents and brokers about the outlook for real estate, a whopping 47% said things will only get worse. On the flip side, 11% reported a market upswing.
In 2004-2006 you need a pulse to make money in real estate with no experience. Now you actually need to work and know your job. The good agents are still busy and closing deals.
Agreed. There are agents making very good livings these days. They have adapted to the new market and thrived. Yet, I know of quite a few others that are fighting for scraps and just getting by.
The statement from the article that 47% of agents/brokers believe things will only get worse reveals a surprising lack of optimism for this industry.
I wonder whether some of the realtors responded this way because while partying hardy between 2003 and 2007 they couldn’t resist downing a couple glasses of the cool-aid themselves.
Some responders may be upside down. I imagine it’s hard to be optimistic for others when you’re knee deep in the sh*t yourself.
All of the RE people I know in San Jose leveraged during the bubble and ended up bankrupt.
As the saying goes, when the janitor is flipping houses too, it’s a bubble.
Very interesting post. When hunting for a house 2 years ago, we ruled out Mello Roos areas, which was tough for us because they typically held the nicest homes, great parks, well-maintained streets and nice schools. I always wondered how homeowners in Mission Viejo got away with deducting Mello Roos from their state income taxes, when it’s not really a deductible tax and never has been.
What’s not explained is why the California Franchise Tax Board did not enforce the non-deductibility of these fees in the first place? A lack of tracking software? Seriously? Even during the good economic times prior to the crash, when the state was fat, dumb and happy, California’s historic avarice for resident tax dollars was never lessened, was it? So this lack of enforcement by the FTB for “decades” doesn’t make any sense.
The last line argument is interesting in that conceptually it DOES apply for intellectual property (like trademarks, copyrights and patents). If you have it, but don’t enforce it’s misuse or abuse over time, then you can certainly lose your rights to it.
I have also seen the same argument applied to zoning standards and community covenants. For example, the covenants may ban side-street parking of RVs, but if a few people do this without getting letters from the association, after a time, the association cannot stop them.
That’s because common law presumes liberty, and if you have a private contract that restricts liberty, but you do not enforce it, the reasonable assumption is that the contract has been abandoned by implicit mutual consent.
Doesn’t apply to the state. The arrangement between the public and the state is NOT a contract and there is (alas) no presumption of liberty. If the DA declines to press charges on a case he never loses the right to do so (barring explicit statutes of limitations). That’s why the OC DA could file murder charges against Nanette of the many last names in 2011 for a murder that happened in 1992. That’s why if the LA PD can start some gang initiative in Comption without anyone arguing they’ve lost the right to arrest people for gang crimes because they haven’t done so for the past oompah loompah years.
I doubt any challenge will be based on arguments of easements. It would probably argue that the FTB’s interpretation of the law is wrong, and that the Legislature fully intended to make Mello-Roos taxes deductible. That will be up to the courts to decide. Interestingly, even if the Legislature itself weighs in and says what it (now) intends, that will not affect the court’s right to decide what the Legislature meant with respect to existing or previous tax bills.
I think the effect will be more then just the additional state tax because of information sharing between IRS & FTB. You won’t be able to deduct it from your Federal taxes either.
I didn’t think to look in the IRS interpretation on this. It would likely be similarly disallowed. So instead of only impacting the 9% California rate for high wage earners, it starts to eat into the 35% federal rate as well.
So I get home pop on the news. Lo-and-b-hold, republican debate is about to begin on CNN. Before the debate begins, a couple reporters are outside the venue sitting on director chairs and there’s quite an audience behind them. Most of them are young and Ron Paul supporters holding their signs and chanting in unison “end the Fed, end the Fed, end the Fed”!!!!!!
I’m sure that makes the Bernank feel comfortable.
Don’t Mello Roos fees expire when the bonds are paid off? Or can they go on forever? I heard that parts of Westpark are paid off and free of it now – Do you know if that is true? It would be good info to know when evaluating a home if the Mello Roos was going to end soon.