Frequently Asked Questions about Taxes and Homeowners Associations
What is Mello-Roos (or Special Taxing District)?
What is the difference between Mello-Roos and an assessment?
Is Mello-Roos tax deductible?
Can property
taxes and Mello-Roos go up?
How long do Mello-Roos
assessments last?
How are Mello-Roos
assessments calculated?
How are Proposition
13 property taxes calculated?
When purchasing a home what fees are tax deductible?
What property tax exceptions
are there?
When are property taxes due?
What is a Homeowners Association?
What are CC&Rs and what
purpose do they serve?
What is Mello-Roos (or Special Taxing District)?
Mello-Roos and Assessment Districts are special tax
districts, created by the California State Legislature in 1982. These districts
collect funds to pay for the vital facilities a new home community needs — such
as streets, schools, water, drainage, parks, sidewalks, median landscaping, and
sewer systems — which otherwise might not be available to initial homeowners in
the community. As you might expect, Mello-Roos taxes are typically found
in newer developments.
The motivation for the creation of the Mello-Roos tax started back in 1978 with
the passage of Proposition 13. Prop 13 limited local governments ability to pay
for capital facilities and services by increasing property taxes. In 1982,
Senator Henry Mello and Assemblyman Mike Roos enacted the Community Facilities
District (now called Mello-Roos) to enable local governments with an another
means to raise needed funds, and the first Mello-Roos district was created in
1986.
An Assessment District or Mello-Roos District is formed by the local government
and can include the City Council, Board of Supervisors, or school districts.
They issue bonds (which are essentially loans) to fund the community's
facilities. To repay the bonds, homeowners will pay assessments, which will be
added to their annual property tax bill. Each community has its own rate, and
assessments can increase or decrease. Depending on where your home is located,
you might have the option of paying the assessment in one lump sum. In some
cases, your assessments may be considered tax deductible. Check with your tax
counselor. This explanation is a summary and not intended to take the place of
the more detailed explanations and legal disclosures that you're entitled to.
When you make your home purchase, be sure that you receive complete information
on Mello-Roos and Assessment Districts.
What is the difference between Mello-Roos and an assessment?
The Mello-Roos Act of 1982 allows certain public entities,
such as cities, counties, schools and local districts, to finance public
infrastructure and certain governmental services. The public entity forms a
community facilities district and, after a public hearing and approval of
two-thirds of the electorate in the district, the district may levy a special
tax on the real property within its boundaries. Because the special tax is a
tax, it is subject to voter approval within the proposed district.
Assessment districts, on the other hand, have been used to finance
infrastructure improvements such as streets, water, sewer and utilities. A city,
county or other public entity can form an assessment district and, after a
public hearing, levy an assessment on the real property in the district to
finance public improvements, like streets or roads.
Is Mello-Roos tax deductible?
Mello-Roos taxes may only be partially deductible depending
upon whether they are for maintenance or improvements. You should consult your
financial advisor before claiming such a deduction.
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. 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 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.
Can property taxes and Mello-Roos go up?
In Mello-Roos districts, rates can increase from year to year based on the charge formula or additional bonds being issued to pay for different phases of improvements. Depending on the state and area you live in, property taxes can also increase.
How long do Mello-Roos assessments last?
The Mello-Roos assessment is usually written for about 15 to 25 years dependent on the community facilities district. Many of the districts have the right to renew the Mello-Roos tax if needed, so don't assume that this tax will disappear during your ownership.
How are Mello-Roos assessments calculated?
The Mello-Roos tax is not based upon the sales price of your home and mostly stays constant even after years of appreciation. Dean Hall is more than happy to research the Mello-Roos assessment for a particular property (if there is one). Just send Dean an e-mail with the property address, and he will provide you with the property tax information.
How are Proposition 13 property taxes calculated?
Unlike Mello-Roos assessments, Proposition 13 taxes are based upon the sales price, so as your home appreciates and is sold, the new buyer has to pay a higher property tax. During your ownership, Proposition 13 limits your appreciation assessment to 2% per year even if your property appreciates substantially more than that. Hurray for Proposition 13!
When purchasing a home what fees are tax deductible?
Generally, any pre-paid interest, pro-rated property taxes and loan origination fees—or points—you paid to obtain your mortgage can be deducted that year from your state and federal tax return if you itemize your return, but you should discuss your individual situation with your financial advisor.
What property tax exceptions are there?
The Homeowner's Exemption will be a deduction of $7,000 from
the sum of the original purchase price and any accrued appreciation. This
net figure will be multiplied by 1%. This state tax rate does not include
local city taxes, special assessments, etc. This exemption applies only to
owner-occupied property. Any improvements to the property are taken into
account to increase the taxable value of the property.
To qualify for the Homeowner's Exemption, the property must be owner occupied on
March 1st. Once you have purchased a home, you are automatically sent a
card for application. The card must completed and returned between March
1st and April 15th. Applications submitted after April 15th but before the
end of the year will quality for only 80% of the exemption. If you have
not received your Homeowner's Exemption card by the 1st week in March, you
should contact your local County Tax Assessor. The only time you should
have to re-file is if there is some change in title. Again, a card should
be sent to you automatically, but if you do not receive it, you should call the
County Tax Assessor.
When are property taxes due?
The property tax year is July 1 through June 30. Taxes are paid in two equal installments. On November 1st, the first installment is due and becomes delinquent if not paid by December 10th, at which time a penalty of 10% is added to the bill. The second installment is due on February 1st and becomes delinquent if not paid by April 10th. If the second installment becomes delinquent, a 10% penalty is added.
What is a Homeowners Association?
Democracy in action. This is the organization that governs regulations and expenditures within a community. The Homeowners Association is typically responsible for the development of an annual budget, the collection of assessments that homeowners pay to maintain and repair "common areas," and the creation of various rules and guidelines for living in the community. Most Homeowners Associations have a Board of Directors that's elected annually. (So that if someone with dictatorial tendencies tries to run the Association, they can be removed.) Each homeowner within the community is a member of the Association with voting privileges.
What are CC&Rs and what purpose do they serve?
The covenants, conditions and restrictions (CC&Rs) are the governing documents that dictate how the homeowners association operates and what rules the homeowners— and their tenants and guests— must obey. This can include the kinds of architectural changes you can make on your home, rules for using recreation facilities or how many pets you can own. CC&Rs are legally enforceable by the homeowners association, unless a specific provision conflicts with federal, state or local laws. CC&Rs help maintain the value of both individual properties and the community as a whole by establishing standards that owners must comply with.