Definition of Mello-Roos
In the U.S., a form of financing that can be used by cities, counties and special districts (such as school districts) to finance major improvements and services within the particular district. Special taxes and bonds used for Mello-Roos financing can only be issued by counties or districts in which two-thirds of the voters in the area have voted in favor of becoming a Mello-Roos district. In instances where the number of registered voters within a Community Facilities District is very small, the required election is held as a property owner election. Sometimes a real estate developer is the only “voter” in such property owner elections that approve a Mello-Roos tax.
Breaking Down Mello-Roos
Mello-Roos districts may issue municipal bonds to finance development projects with high costs. If voters in the area have elected to become a Mello-Roos district, they are responsible for the repayment of these bonds through a special tax, assessed annually based on the value of the properties within the district. Mello-Roos financed developments might include schools, roads, libraries, police and fire protection services or ambulance services. This type of financing is named after Henry Mello and Mike Roos of the California legislature, who sponsored legislation in 1982 to authorize this form of financing.
Many communities requiring new schools or other public infrastructures such as public parks and roads may impose Mello-Roos taxes as an alternative to (or in addition to) impact fees paid directly by real estate developers. While real property taxes are generally levied as a percentage of the assessed value of the parcel, a Mello-Roos tax is levied independent of assessed property value (a parcel tax) and is not subject to Proposition 13 property tax rate limitations.
In Laymen’s Terms…
The city charges for new city services that must be added to accommodate a subdivision. The costs are given to the developer who may then either pay for them or pass along all or a portion thereof to the homeowners in a new community. These costs are typically in the form of a long-term assessment.
Common Local Areas with Mello-Roos
In our San Fernando Valley area of Southern California, it is common to find Mello-Roos in newer communities, such as Calabasas or the Santa Clarita Valley. Smaller pockets may be found, so be sure to keep an eye out on it!
How Will I Know My Home Has Mello-Roos?
There are typically two different places that a Mello-Roos tax could be identified during a home purchase: the 9A Report and the preliminary title report. Both of these reports will typically show what taxes are due and/or if there are special assessments currently levied.
How Long do Mello-Roos Last?
The timeframe can vary depending on the agreement between the developer and the city, but it is not uncommon to see them last for 20-30 years.
There is conflicting information on whether Mello-Roos taxes are deductible from federal and state income taxes. In general, only “ad valorem” property taxes (based on the value of the property) are deductible. Mello-Roos taxes are not ad valorem property taxes, but rather are generally flat parcel taxes. However, the IRS has stated that:
“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).”
California uses the federal standard for deductibility of property taxes on state income tax. In either case, the taxpayer has the burden to establish that the deduction of Mello-Roos taxes falls under these criteria.
If you’d like more information on the San Fernando Valley or Los Angeles, or to have help looking for your next home, please feel free to reach out! I’m happy to help, no obligation.