Is Mello-Roos Tax Deductible?

The article below is up to date based on the latest tax laws. It is accurate for your 2017 taxes, which you will file by the April 2018 deadline. Learn more about tax reform here.

Most taxpayers know that property taxes and mortgage interest are tax deductible, but until you move into a Community Facilities District in California, you probably haven’t heard of Mello-Roos before.

When Proposition 13 was passed in 1978, it limited how local governments could tax real estate. Before Proposition 13, real estate property taxes averaged a little under 3% of market value. After Proposition 13, property tax values were frozen at 1976 assessed values and property tax increases could not be greater than 2% per year as long as a home was not sold. Once it was sold, the property was reassessed at 1% of the sale price and the 2% annual cap was reinstated.

This was great for homeowners, but terrible for local governments looking to property taxes as a way to fund local projects. Local governments found it difficult to maintain services with a limited means of collecting property tax. The Mello-Roos tax was created to collect more tax revenue and is a type of parcel tax, which is not levied based on the value of the property.

Mello-Roos are special districts, established by local governments in California, where there is a special property tax assessed on real estate. It was created by the Mello-Roos Community Facilities Act of 1982 and enacted by the California state legislature back in 1982. The funny name, Mello-Roos, comes from the bill’s co-authors, Senator Henry J. Mello and Assemblyman Mike Roos.

Is Mello-Roos Tax Deductible?

It depends.

According to the IRS, only “ad valorem” property taxes (“according to value”) are tax deductible. Many Mello-Roos taxes are not based on the value of the home, which makes many not tax deductible.

However the IRS has stated that there are exceptions:

“Assessments on real property owners, based other than on the assessed value of the property, may be tax deductible if they are levied for the general public welfare by a proper taxing authority at a like rate on owners of all properties in the taxing authority’s jurisdiction, and if the assessments are not for local benefits (unless for maintenance or interest charges).”

Mello-Roos taxes can be tax deductible if it meets all of those conditions, but Mello-Roos taxes are often used for a variety of local purposes. They can be used for public services, like police and fire protection, as well as maintenance and repair, like fixing schools, libraries, sidewalks, and electrical lines. Many of those are local benefits, making them not tax deductible.

If a Mello-Roos tax went to build a library, for example, it is not tax deductible because that is a local benefit. To deduct the tax, you need to be able to show how much of the tax went towards maintenance and interest charges, which can be difficult.

If you review your property tax bill, one clear indicator that a tax is deductible is if there is a tax rate shown. That means the tax was assessed based on the value of the home, which makes it tax deductible.

Don’t worry about knowing this tax law. TurboTax will ask you simple questions and give you the tax deductions and credits you’re eligible for based on your answers. If you still have questions, you can connect live via one-way video to a TurboTax Live CPA or Enrolled Agent to get your tax questions answered and have your tax return reviewed so you can sign and file with confidence.