Monday, October 30, 2006

Is Mello-Roos deductable?

Good Morning,
Have you been writing off your real estate taxes correctly on your federal income tax filings? Maybe not?
Whatever your answer, an influential Capitol Hill committee believes tens of thousands of homeowners have been deducting a lot more than they should -- to the tune of hundreds of millions of dollars a year.
Now the nonpartisan congressional Joint Committee on Taxation has proposed to the Senate and the House that they consider plugging two revenue-losing loopholes in the system, and crack down on homeowners who are deducting too much.
In a new report released last week, the staff of the committee recommends requiring local governments or mortgage lenders to annually report to the IRS the itemized details of the property tax payments claimed by millions of homeowners. Property tax deductions now cost the federal government $20 billion a year, according to committee estimates. A 1993 federal study found that approximately $400 million of that year’s property tax writeoffs were improperly claimed -- a figure that could easily be double that today.
Under current tax code rules, homeowners are permitted to write off local and state property taxes that are assessed on the basis of property valuations. But commonplace special levies and user fees -- for governmental services that mainly benefit individual houses or neighborhoods rather than the entire municipality -- are not deductible like Mello-Roos Community Facilities Districts.
Special parkland improvements, sewers, sidewalks, garbage collections, landscaping, tennis courts and a long list of others sometimes are funded by tax levies on the property owners directly benefited. Local governments typically include their special benefit levies in with their regular property tax bills when they send them to homeowners, but they do not report the itemized breakdowns to the federal government.
The committee believes the IRS would be in a better position to audit homeowners’ tax deduction claims if the agency received an annual itemization -- either from local governments directly or from the mortgage lenders who typically disburse the tax payments from their borrowers’ escrow accounts. Since lenders already report total mortgage interest paid by each borrower to the IRS, the committee believes it would not be a major inconvenience to add in property tax itemizations with those reports.
The staff recommends that either local governments or mortgage lenders be required by federal law to provide the IRS with such itemizations annually. Watch for this regulation to become effective next year.


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