Mello Roos Fees

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Submitted by 1HOPE4U on October 2, 2007 - 7:53pm

In considering a purchase in 4S Ranch (Rancho Bernardo, San Diego), I'm having a hard time overlooking the high Mello Roos costs on top of the price of the homes.

My questions to anyone who has insight into Mello Roos Fees are:
1. Do Mello Roos (MR) fees actually go down the longer you live in a community?
2. What could cause Mello Roos fees to go up (would the inability to build out/sell out in a community such as 4s ranch cause a spike in fees)?
3. What would cost more over 30 years--the MR fees one pays on a 600k home or purchasing a home that is 70-80k more in a community w/o MR fees? This maybe basic math, but are there other things I'm not considering besides the type of loan and the rate one gets on the loan?
4. Can one write off the Mello Roos fees come time for tax filing?

I look forward to your responses!

Submitted by flu on October 2, 2007 - 8:29pm.

They aren't forever...(although for practical purposes, they are for a long time).

Submitted by SD Realtor on October 2, 2007 - 11:34pm.

I will try to help. Forgive my answers if they are vague...

First I am going to lump 1 and 2 into the same answer...Here are the questions:

1. Do Mello Roos (MR) fees actually go down the longer you live in a community?
2. What could cause Mello Roos fees to go up (would the inability to build out/sell out in a community such as 4s ranch cause a spike in fees)?

Recall - MR provides local government an additional financing tool for infrastructure development. A Mello-Roos district is an area where a special tax is imposed on real property owners within a Community Facilities District. The Community Facilities Districe has chosen to seek public financing through the sale of bonds for the purpose of infrastructure development. The tax you pay is used to make the payments of principal and interest on the bonds.

So first off, there is no limit on the MR taxes. Unlike prop 13, which does provide a limit based on the value of the property, NR taxes are generally equally and uniformly applied to all properties in the district.

So how long does MR stay in effect? The tax stays in effect as long as it is needed to pay the expenses of the services OR until the principal and interest on the bonds are paid off along with ANY reasonable administrative costs incurred in collecting the MR tax...the maximum time for MR is 40 years...

My point is... don't count on them going away or going down. The point is that they need to cover the services for which they were set for and those services in some cases may be on going and can include police protection, fire protection, ambulance and paramedic services, recreation program services, library services, the operation and maintenance of parks, parkways and open space, museums, cultural facilities, flood and storm protection, and services for the removal of any threatening hazardous substance. Facilities which may be financed under the Act include: Property with an estimated useful life of five years or longer, parks, recreation facilities, parkway facilities, open-space facilities, elementary and secondary school sites and structures, libraries, child care facilities, natural gas pipeline facilities, telephone lines, facilities to transmit and distribute electrical energy, cable television lines, and others... Aye caramba!!!

What would cost more over 30 years--the MR fees one pays on a 600k home or purchasing a home that is 70-80k more in a community w/o MR fees? This maybe basic math, but are there other things I'm not considering besides the type of loan and the rate one gets on the loan?

Well not accounting for inflation... Lets say your MR was 1%...okay I will be nice... say .8% on 600k. So that is 4800 bones yeah? okay so 30 * 4800 is what 144k? So that also assumes they do not go up or down and probably does not answer your question about whether it is worth it to buy a home that is 70-80k more. Like you said, lots of angles to consider given your financing, inflation, etc...Sit down with your realtor and run all the numbers.

Can one write off MR fees?

Well ask your accountant. Technically the answer is no if it is a primary owned home. However I would bet 95% of all homeowners that pay MR and live in the home write them off...PLEASE NOTE I AM NOT ADVISING YOU IN ANY WAY SHAPE OR FORM ABOUT DECLARING MR OR NOT.

Also I just regurgitated all the MR stuff above by looking on line for a few minutes...

Submitted by Alex_angel on October 3, 2007 - 7:01am.

If MR is built into your property tax then if you pay 1.75% per year then can't you write it all off?

Submitted by SD Realtor on October 3, 2007 - 8:36am.

It is not built into your property tax. It is assessed at the same time as your property tax and is on the same form. However it is not built in.

SD Realtor

Submitted by Alex_angel on October 3, 2007 - 9:36am.

I remember reading that the IRS estimates that a large percentage of people do write it off but have yet to pursue it. I can see someone doing this for 3 to 4 years then all of a sudden the IRS is up for a cash grab and sends out letters to people that they own $10000 in back taxes.

Submitted by fsbo on October 3, 2007 - 11:25am.

Regarding tax deductibility, it depends, mostly "No" - please see the link for the details.

Submitted by raptorduck on October 3, 2007 - 11:44am.

fsbo, very helpful. Thank you.

Submitted by Alex_angel on October 3, 2007 - 12:18pm.

They put this vague statement in.

You must prove that the mello roos went to

"Other similar improvements"

You must love the loopholes.

Submitted by 1HOPE4U on October 3, 2007 - 8:40pm.

Thanks to all who responded and provided the great info. Yeah, that is quite scary to later find out that taxes are going to be collected on something you thought you could write off.

Also, I guess I'll need to amoritize payments through the term of the loan and compare that amount (of the higher priced home) with that of the home with MR fees.

For places such as Del Sur and 4s Ranch, which do charge MR fees, is it probable that those MR fees will increase b/c of the lack of buildout and current market of slowed building/new home purchases? Or in other words, are those who are currently living in those areas left with an increasing bag of MR fees/taxes b/c there are less occupied homes/families to foot the MR fees?

Submitted by SD Realtor on October 3, 2007 - 10:17pm.

It is hard to say because each particular district has the bonds issued for whatever they need them to be. You would need to find out about the particular details of this exact MR assessment for this exact district. You can find these details out but you really need to dig down to get that information. Essentially then you would need to verify how they broke down the cost and how many homes they assumed would be built out in the district. I would be more worried about on going fees increasing then lack of buildout. I am sorry about being vague but the only real way for you to get reliable answers is for you to do the research to find out about this assessment for this particular district.

SD Realtor

Submitted by hpi on October 3, 2007 - 10:41pm.

I guess for most of the new areas, the MR can be deducted as normal tax, becase we could take the bond (that the MR is going for) as a 30 yr mortgage. How much percetage of it is actually for the inerest instead of the principle for the first 10 years. Since the inertest dominates the earlier years of the payment, it should be largely tax deductible.

In the last 10 yrs of the bond, I believe most of the payment will pay to the principle ... BTW that is 20 years later, $3700 at that time might only worth $370 today, and the median home price will be 1.5-2 million ...

My $0.02

Submitted by jl in sd on October 3, 2007 - 11:12pm.

Most of the Mello-Roos in 4S Ranch is going to the Poway school district. The amount can increase up to 2% a year. If you are interested to buy in the area, you should be able to go to any of the builders and ask for additional information.

Submitted by schizo2buyORnot on October 4, 2007 - 1:09am.

Cal. Senate legislative analysis of Mello Roos deductibility

"Because the IRS has not challenged the deductibility of Mello-Roos taxes, the prevailing view is that Mello-Roos taxes are deductible. However, if the IRS were requested to issue a letter ruling on this issue, observers speculate that the ruling would prohibit the deductibility of Mello-Roos taxes on income tax returns."

"Some observers maintain that the question of tax deductibility depends on the nature of the project being financed. They claim that if the taxes are being used to finance a facility or project that benefits the general welfare and is more regional in nature, generally the taxes are deductible."

Bottom line . . . everyone is doing it under the guise of "well it might be deductible, there's no clear law, its going to same me a pile of cash, and I can always claim 'gee I didn't know'" Gotta love government efficiency and fairness in looking out of the little guy.

2007 Legal journal article giving you all you ever wanted to know on "mello roos", prop 13, and how to cure insomnia . . . . (first part well organized) (whole article poorly organized)

In search of a crystal ball . . . .

Submitted by Alex_angel on October 4, 2007 - 6:33am.

4S is nearly built out so no nee to worry about them not finishing. There are a lot of homes that have been paying the MR now for the last few years. Del Sur though is far from being built out.

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