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Dear ———–:
I am responding to your letter to the Chief Counsel dated December 8, 2011, in which
you asked for clarification of the Internal Revenue Service’s views on whether real
property taxes must be assessed on an ad valorem basis to be deductible for federal
income tax purposes.
You note that the 2011 instructions for the Form 1040 Schedule A, Itemized Deductions,
state that real property taxes are deductible “only if the taxes are based on the
assessed value of the property.” On the other hand, a 2003 Chief Counsel
memorandum dated November 24, 2003, regarding the deductibility of California MelloRoos and other assessments, concludes that those assessments may, depending on
the facts and circumstances, be deductible as real property taxes even though they are
not imposed on an ad valorem basis.
Section 164(a)(1) of the Internal Revenue Code permits a deduction for real property
taxes, but does not define what constitutes a real property tax. Personal property taxes
also may be deductible under § 164(a), but § 164(b)(1) requires a personal property tax
be an ad valorem tax to be deductible. The Code does not explicitly require the same
for real property taxes. Section 1.164-4(a) of the Income Tax Regulations explains that
to be deductible, a real property tax must be levied for the general public welfare at a
like rate against all real property in the taxing authority’s jurisdiction. In general, an GENIN-152082-11 2
amount that is assessed only on specific property benefitted by a local benefit (such as
for streets, sidewalks, and like improvements) cannot be deducted as a real property
tax. However, § 1.164-4(b)(1) permits a deduction for assessments to provide local
benefits to the extent that the taxpayer can show they were imposed to repair, maintain,
or meet interest charges for such benefits.
Revenue Ruling 80-121, 1980-1 C.B. 43, notes that a characteristic common to many
real property taxes is that the tax is measured by the value of the real property.
However, there is no statutory or regulatory requirement that a real property tax be an
ad valorem tax to be deductible for federal income tax purposes. Assessments on real
property owners, based other than on the assessed value of the property, may be
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).
We will recommend appropriate revisions to our forms and publications on this subject.
I hope this information is helpful. If you have any questions, please contact me or —
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Sincerely,
Christopher F. Kane
Chief, Branch 3
Associate Chief Counsel
(Income Tax & Accounting)
[/quote](emphasis added)
The Chief Counsel seems to be stating here that (MR) assessments may be 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)…
MR isn’t levied “on all properties in the taxing authority’s jurisdiction.” It’s only levied on the properties within CFD’s in which the bonds have not yet been retired.
In addition, MR assessments in CA ARE for local benefits, not “maintenance” because the local jurisdictions (city/county) maintain the public lands within the CFD’s.
However, some of the MR payments service interest charges.
Without further direction from the IRS/FTB, this issue seems like it could be a quagmire for affected taxpayers.
