FAQ: What is Mello-Roos?

Ever since I started publishing Frequently Asked Questions for Real Estate, the questions get better and better. I am pleased to announce that beginning with the next issue, I will provide a gift card to the person whose question I feature in this column. I think it’s well-deserved! As always, I will answer your questions when you ask them, and I will let you know if it is a candidate for this column. So, please, ask away! And email those questions to changhomes@gmail.com.

In short, Mello-Roos is a special tax is imposed on real property owners based on the size of their home to pay for infrastructure improvements such as streets, water, sewage and drainage, electricity, infrastructure, schools, parks and police protection to newly developing areas.

Homeowners pay for Mello-Roos as part of their Los Angeles County property tax bill, which pays for the principal and interest on bonds that were taken out when the builder first built on the land for these infrastructure improvements.

Background
This method of financing came about in 1982 and was a direct result of the passage of Proposition 13 in 1978 in California, which limited the amount of revenue that could be raised to support new developments through traditional means. Only those new developments that choose to create a Community Facilities District impose this added tax burden on homeowners. Otherwise the infrastructure improvements are shouldered on the builder-developers of the subdivision.

Builders choose not to pay for these infrastructure improvements to keep new home prices competitive to homes built in already-established areas.

Bonds usually run for 20 to 40 years and are repaid by homeowners. This means for example that your "overall tax burden" when you purchase a home with Mello Roos financing can be 60%, 80%, or 100% higher than your basic property tax obligation would be if you purchased the same home without Mello Roos financing. Often, once bonds are paid, the Community Facilities District still bills a substantially lower amount to cover continued maintenance of the infrastructure improvements.

Amount
Typically, an adopted formula that relates to the size of the home (square footage or lot size) is used to determine the amount of an individual assessment. In general, the special taxes and assessments do not exceed 1% to 1.5% of the market value of new homes. Moreover, the total amount of all annual taxes (including property tax) usually does not exceed 2% to 2.5% of the home’s market value.

The amount can increase, but only at a maximum rate of 2% per year over a 25 years period. On the other hand, it’s possible that this tax will decrease, should state or other funds become available that could be used to reduce existing bond indebtedness, or be used to construct new facilities in lieu of additional bond sales.

If it’s part of the Property Tax Bill, is it tax-deductible?
Mello-Roos taxes cannot be deducted 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 annual county property tax bill with other deductible property taxes. That does not mean one can deduct the Mello-Roos taxes. One may only be able to deduct a portion of the total property tax shown on your bill.

To deduct local benefit taxes, one must be able to show the amount of the taxes that are for maintenance, repair, or interest. If one cannot show what part of the local benefit taxes are for these charges, one cannot deduct the taxes.

For tax advice, please consult your tax preparer or CPA.

School Debate in the Santa Clarita Valley Rooted in Mello-Roos
William S. Hart Union High School District School Board meeting in early February 2007 turned heated when plans were announced to bus incoming freshmen from Castaic to West Ranch High School beginning 2009 until a new Castaic high school is completed in 2011.

The February 9, 2007, Santa Clarita Signal reported this plan didn't go over well with Stevenson Ranch families who want West Ranch High School - a school their Mello-Roos developer fees help maintain - to have exclusively Stevenson Ranch students.

There were both shouts of support and "boos" from the audience when people expressed their concern that Castaic students were clogging up a school site that Stevenson Ranch residents had paid top dollar for.

Based on their home's square footage, Stevenson Ranch residents pay anywhere from $1,600 to $4,000 in Mello-Roos funds on top of their property taxes.

"When we moved to Stevenson Ranch, we paid for all these schools. We're paying for (West Ranch)," resident Karyn Malchus said. "The e-mails are flying. This is huge."

Through the course of the night, tensions between the Castaic-area residents and the Stevenson Ranch area residents grew more heated.

Sources: California Tax Data of Irvine, CA, Fidelity National Title Insurance Company, Santa Clarita Signal.

Disclaimer: Mr. Chang has helped numerous families with purchasing and selling homes in Mello-Roos districts, but he is not an expert in law or taxes. Please consult your attorney, tax advisor, CPA or tax preparer for additional information regarding this topic.

Questions answered in this column were asked by my clients, past clients, or prospective buyers and sellers. The questions were answered when they were asked, and they were notified if the question is a candidate for the FAQ column. Questions are chosen based on interest to a wider audience, timeliness to the current market, and possibly other factors. Those whose questions are featured in this column get a gift card to their favorite store, restaurant, mall or movie theatre in the Tri-Valley area if they allow me to publish their name or initials and the city in which they live in this column. You can email your questions for a prompt response to changhomes@gmail.com.