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Niko, Both Buyer and Seller in Orange County, CA

What is Mello-Roos tax ?

Asked by Niko, Orange County, CA Fri Oct 12, 2007

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11
As a CPA, please allow me to add a tax perspective from my blog on Active Rain. Please email me at Nancy@TheOCExperts.com if you have any questions.

Are Mellos Roos "Taxes" Deductible?
While they "sound" deductible, they often are not. If you own or are considering buying a home with Mello Roos, be sure to contact your Mello Roos District and ask them specifically what the assessment covers. If questioned, you must prove that the tax is deductible. Better to be safe than sorry. Be sure to also consult with your tax adviser - just be sure to get clarity as it's not a simple "yes or no" answer.

Here's a great summary from the California FTB with some commentary of my own in parenthesis.

You cannot deduct Mello-Roos taxes if they are assessed to fund local benefits and improvements that tend to increase the value of your property. (Which is usually the case!) Mello-Roos taxes may appear on your annual county property tax bill with other deductible property taxes. That does not mean you can deduct the Mello-Roos taxes. You may only be able to deduct a portion of the total property tax shown on your bill.

Most of the time, you cannot deduct real estate taxes assessed for local benefits and improvements. However, you can deduct them if they are for maintenance, repair, or interest charges related to those benefits. Some examples of (nondeductible!) local benefits are:

Sidewalks
Streets
Sewer lines
Water mains
Public parking facilities
Other similar improvements
To deduct local benefit taxes, you must be able to show the amount of the taxes that are for maintenance, repair, or interest. If you cannot show what part of the local benefit taxes are for these charges, you cannot deduct the taxes.

Again, check with the Mello Roos District.

Have a great day,

Nancy Moeller, CPA, REALTOR
1 vote Thank Flag Link Fri Oct 12, 2007
I posted this in reply to a question by another consumer last month:

" The interest rates for financing Mello-Roos levies as general obligation bonds are comparatively low. Such bonds are exempt from both state and federal income taxes on the interest they earn, and therefore are sold to investors as "tax-free muni bonds", with interest rates well below the going rate for residential mortgage loans. If the lump sum amount of a Mello-Roos bond were, for example, $11,000, the annual interest as a general obligation bond might cost the homeowner $495 at 4.5% annual interest rate as a "muni bond". However, for the very same amount, could cost $770 at 7% interest financed at regular market rates for mortgages. "


"After all is said and done, the final and only issue that a buyer needs to consider when deciding between a home located in a Mello-Roos District (or any other special assessment district, for that matter), and one that isn't, is: how much down and how much per month for an essentially equal home offering the identical value. If the monthly payment is the same for either, then it's a wash. Whether the payment is skewed toward high principal and interest, with lower taxes on one, or the payment is skewed toward lower principal and interest, with higher taxes on the other, it's still the same monthly payment"



Reference: 1. http://www.jimgrattan.com/misc/special_topics.htm
1 vote Thank Flag Link Fri Oct 12, 2007
Jim Walker, Real Estate Pro in Carmichael, CA
MVP'08
Contact
Mello-Roos is a CA Community Facilities Act developed in 1982 to allow county, city, special district, special district or joint powers authority to establish an agreement which allows for financing of public improvements and services. The services and improvements that Mello-Roos can finance include streets, sewer system and other basic infrastructure, policy, fire, school, ambulance, and other cultural facilities.

See the link for a detailed description http://mello-roos.com/pdf/mrpdf.pdf

When you purchase a property, in addition to the normal property tax, you want to find out if there are any other assessments which you would have to pay, and the length of the special assessments are. New developments usually come with those assessments.

There are several companies offer Tax Data, hazard information or past insurance claims for a specific property for a nominal fee. A good way to get peace of mind when you purchase.

Sylvia
1 vote Thank Flag Link Fri Oct 12, 2007
Sylvia Barry,…, Real Estate Pro in Marin, CA
MVP'08
Contact
Hello Niko,

Below is an excerpt from Californiataxdata.com and it adequately describes the Mello-Roos Tax. I will also include a link for you to read additional information on the Tax. I hope this helps answer your question.

The Mello-Roos Community Facilities Act of 1982
The Act allows any county, city, special district, school district or joint powers authority to
establish a Mello-Roos Community Facilities District (a “CFD”) which allows for financing of
public improvements and services. The services and improvements that Mello-Roos CFDs
can finance include streets, sewer systems and other basic infrastructure, police protection,
fire protection, ambulance services, schools, parks, libraries, museums and other cultural
facilities. By law, the CFD is also entitled to recover expenses needed to form the CFD and
administer the annual special taxes and bonded debt.

Cheers,

Ken Herrera
Century 21 Infinity
1 vote Thank Flag Link Fri Oct 12, 2007
Niko, Both Buyer and Seller in Orange County, CA
What is Mello-Roos tax ?
0 votes Thank Flag Link Thu Aug 9, 2012
George, Nancy,and Smarty. I did not know that. This was news to me about the non-deductibility of portions of the Mello Roos Tax and the accelerated foreclosure power of CFD's.
Liek George, I don't recall seeing this information in the CAR mello-roos disclosure form or the Property ID report. Don't know if I missed it or if it is just not there.

Thank you for increasing my knowledge.

George, do you know if any CFD's are actually using this power to foerclose in 90 days?

I would think that because so many banks do not pay these assesments or any other taxes during their ownership of REO properties that they would be in great position to force the banks to either pay up or get out of the way and let the CFD sell the property at considerable profit for the CFD.

Smarty, when I proposed that it was a "wash" I was under the impression that mello roos was, like, the base property taxes, tax deductible for income tax purposes too. With Nancy's perspective added, one would have to consider the different tax treatments as well to figure out how much of a payment was a wash.

The (new to me ) information does diminish the value of a home carrying Mello Roos liability competing against homes without the handicap) in my opinion, but it does not completely destroy all value.

Advising a buyer, I will have to reccommend that he weigh the values and benefits of living in the newer community that has it versus trying to find one that does not have it.

If you prefer older homes and old neighbrhoods then great, but if you want from new, your choices will be trucated if you banish Mello entirely from your search.
0 votes Thank Flag Link Fri Feb 27, 2009
Jim Walker, Real Estate Pro in Carmichael, CA
MVP'08
Contact
You all don't mention that:

"Rights to Accelerated Foreclosure. It is important for CFD (Mello Roos) property owners to pay
their tax bill on time. The CFD has the right (and if bonds are issued, the obligation) to
foreclose on property when special taxes are delinquent for more than 90 days.
Additionally, any costs of collection and penalties must be paid by the delinquent property
owner. This is considerably faster than the standard 5 year waiting period on county ad
valorem taxes."

I don't recall this information being in any disclosure form.

Only a fool would buy a property with Mello Roos.
0 votes Thank Flag Link Fri Feb 27, 2009
Question: Post below by John Walker

"After all is said and done, the final and only issue that a buyer needs to consider when deciding between a home located in a Mello-Roos District (or any other special assessment district, for that matter), and one that isn't, is: how much down and how much per month for an essentially equal home offering the identical value. If the monthly payment is the same for either, then it's a wash. Whether the payment is skewed toward high principal and interest, with lower taxes on one, or the payment is skewed toward lower principal and interest, with higher taxes on the other, it's still the same monthly payment"

Question:

In some parts of San Diego, Mello Roos are upwards of $4,500 per year. If $700K can buy you one house with Mello Roos and $750K could buy you another without, wouldn't that make more sense, all things being equal, to buy more home and still pay out the same in monthly payments? Get more home, deduct more mortgage interest, while keeping your payment the same?

Therefore, wouldn't it make sense, if you have "X" dollars to spend each month, to factor in the difference in mortgage interest deductions you can take if buying a home with or without Mello-Roos? To me, not being able to deduct that portion of your tax bill, buys you more home and ultimately allows you to deduct more mortgage interest, therefore giving you more bang for your bottom line buck..

Am I missing something? Just wondering what your thought was on that one? Thanks!
0 votes Thank Flag Link Mon Jun 16, 2008
Great post Nany........We love when you post information that is helpful. Sorry Niko to borrow your thread on this one with a private note to Nancy on posting.

Niko, You have gotten some great input responses.
0 votes Thank Flag Link Sat Oct 13, 2007
Deborah Madey, Real Estate Pro in Red Bank, NJ
MVP'08
Contact
Mello Roos is a joke. Some cities/counties allowed Mello-Roos to provide builders an incentive to build in their juristriction. Instead of charging builders for schools and parks, they allowed builders to pass this aditional tax onto homeowners to pay for infrastructure and schools.

Bad amendment.

Why would you buy a home where your taxes are $500 - $3,000 more than the county average.

Especially in this market. Mello Roos is absolutley killing the Antioch, CA market.. I am sure there are other areas equally as afected. Or, I should say Infected. What a shame.

Shame on you... Contra Costa County.
0 votes Thank Flag Link Fri Oct 12, 2007
Niko,
Mello-Roos as quoted from the California Tax Data Website:

http://www.californiataxdata.com/A_Free_Resources/faq.asp#faq_04

What is Mello-Roos and why do I have to pay it?
Mello-Roos is a form of financing that can be used by cities, counties, and special districts (such as school disricts). Mello-Roos Community Facilities Districts (referred to as "CFDs") raise money through special taxes that must be approved by 2/3rds of the voters within the district. A CFD is formed to finance major improvements and services within the district which might include schools, roads, libraries, police and fire protection services, or ambulance services. The taxes are secured by a continuing lien and are levied annually against property within the district.

How do I pay my Mello-Roos Special Taxes?
In almost all cases, Mello-Roos special taxes are levied as part of the annual property tax bill. You should be able to find your Mello-Roos special tax as a line item on that bill. In rare cases, a Mello-Roos district will send out its own bill. To find out more about this bill, you will need to contact the agency directly.

Why do I have to give a buyer a Notice of Special Tax when I sell my property?
Since July of 1990, California Civil Code Section 1102.6 has required that sellers make a good faith effort to give property buyers a "Notice of Special Tax" if the property is in a Mello-Roos district. The notice must include the current year's maximum special tax for the parcel, the rate at which that maximum tax may increase per year, and the final date in which special taxes may be collected for bonded indebtedness. Property sold "as is" is not exempt from providing this disclosure, as stated in Section 1102.1 of the California Civil Code.

Niko,
Between Orange, Riverside and San Diego Counties different phrases or types of taxes are referred to. For instance one area may have a Mello-Roos while another may have a Special Assessment. Keep in mind that the following key words should brind out the basic information .
Property Tax (Capped at 1% of the properties full cash value, by California proposition 13)
Special Assessments
Mello-Roos
Total Tax Rate

If you need further assistance, please do not hesitate to contact me.
0 votes Thank Flag Link Fri Oct 12, 2007
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