[quote=SanDiegoDave][quote=PKMAN]…after realizing that deducting MR as property tax is illegal.[/quote]

Does anyone know why it’s illegal? It’s property tax. No property? No Mello-Roos tax. Seems pretty straightforward to me.

Have there been court cases where the IRS won, when preventing someone from deducting MR?

We pretty much ruled out any properties with MR during our home search over the last two years.[/quote]

It’s not deductible because, unlike normal property tax (which goes to fund the state), the vast majority of Mello-Roos taxes goes to directly fund neighborhood improvements. Since the property owner directly benefits from the Mello-Roos payments to a much greater degree than someone located, say, 25 miles away would, it’s not considered to be tax deductible as a general fund property tax.

The final word from CA franchise tax board on it:

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.

For more information, you can:

Contact your Mello-Roos District.
Get Internal Revenue Service Publication 17, Your Federal Income Taxes-Individuals, Chapter 24.