After announcing its intention to add additional reporting requirements relating to real estate tax deductions, the California Franchise Tax Board (FTB) has abruptly changed course. The FTB recently announced that it would require California taxpayers to separately report ad valorem taxes, assessments, special taxes and fees not based on a property valuation basis. The FTB further announced that only ad valorem based real estate taxes would be deductible, thus disqualifying special taxes levied by Mello-Roos Community Facilities Districts as allowable real property tax deductions. The FTB had announced its policy as being based on the federal income tax treatment of real estate taxes as a deductible item from income.
The IRS, in response to a FTB request for clarification as to the deductibility of real estate taxes, has stated the following:
“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).”
Based on the IRS notification, the FTB has announced its plan to “review” expected revisions to IRS forms and publications before implementing revisions to its California tax form instructions. Accordingly, the FTB has rescinded its plan to add the additional reporting requirements related to the real estate tax deduction beginning with the 2012 tax return.