FTB Announces Major Changes in Real Property Tax Deductions

March 12, 2012
Continuing its efforts to enhance tax collections, the State Franchise Tax Board (“FTB”) has announced a significant change to the reporting requirements for real property tax deductions.

According to the FTB, commencing for all 2012 tax returns, only the amount based on the “ad valorem” value of a taxpayer’s property is deductible. Accordingly, non-ad valorem special assessments, special taxes, including Mello-Roos special tax levies, fees, and charges will not be deductible.

For most counties, these amounts are identified on the tax bills as amounts that do not include a tax rate percentage. The deductible amount is generally identified on property tax bills as the assessed value multiplied by an associated tax rate percentage.

The FTB’s policy will likely come as a great surprise to taxpayers whose properties are encumbered by CFD’s and non-ad valorem assessments. It has been widely understood that at least the interest on the bonds serviced with levies of special taxes and assessments are deductible. In practice, taxpayers generally deduct all of the special taxes and assessments shown on their tax bills. The policy announced by the FTB could also spawn a wave of litigation based on alleged misrepresentations associated with purchases of properties subject to CFD’s.

AB 1552, as introduced by Assemblyman Silva, would allow a deduction, under both the Personal Income Tax Law and Corporation Tax Law, of all amounts paid under the Mello-Roos Community Facilities Act of 1982.

This Bill would take effect immediately as a tax levy.

Michael Joyce
Orange County
(949) 851-5434

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