Understanding Mello-Roos

Posted on by Emi Tsuji

When purchasing your new home, your future monthly payments will be made up of principal, interest, real property taxes and insurance, but what is the tax for the Community Facilities District, otherwise known as a Mello-Roos District? This post answers some of the questions most commonly asked about the Mello-Roos Community Facilities Act.

What is a Mello-Roos District?

Mello-Roos District is an area where a special tax is imposed on those real property owners within a Community Facilities District. This district has chosen to seek public financing through the sale of bonds for the purpose of financing certain public improvements and services. These services may include streets, water, sewage and drainage, electricity, infrastructure, schools, parks and police protection to newly developing areas. The tax you pay is used to make the payments of principal and interest on the bonds.

Are the assessments included within the Proposition 13 tax limits?

No. The passage of Proposition 13 in 1978 severely restricted local government in its ability to finance public capital facilities and services by increasing real property taxes. The “Mello-Roos Community Facilities Act of 1982” provided local government with an additional financing tool. The Proposition 13 tax limits are on the value of the real property, while Mello-Roos taxes are equally and uniformly applied to all properties.

What are my Mello-Roos taxes paying for?

suburbs-zoomYour taxes may be paying for both services and facilities. The services may be financed only to the extent of new growth, and services 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.

When do I pay these taxes?

By purchasing an interest in a subdivision within a Community Facilities District you can expect to be assessed for a Mello-Roos tax which will typically be collected with your general property tax bill. These special tax payments are subject to the same penalties that apply to regular property taxes.

How long does the tax stay in effect?

The tax will stay in effect until the principal and interest on the bonds are paid off along with any reasonable administrative costs incurred in collecting the special tax or so long as it is needed to pay the expenses of services, but in no case shall exceed 40 years.

What happens if a general tax payment is not made on time?

Because the Mello-Roos tax is typically collected with your general property tax bill, the Facilities District that obtained the lien may withdraw the assessment from the tax roll and commence judicial foreclosure.

What is the basis for the tax?

House FrameMost special taxes levied on properties within these districts have been structured on the basis of density of development, square footage of construction, or flat acreage charges. The act, however, allows for considerable flexibility in the method of apportionment of taxes, and the local agencies may have established an entirely different method of levying the special tax against property in the district in question.

How much will the Mello-Roos payment be?

The amount of tax may vary from year-to-year, but may not exceed the maximum amount specified when the district was created. In the case of the purchase of a new house within a subdivision, the maximum amount of the tax will be specified in the public report. The Resolution of Formation must specify the rate, method of apportionment, and manner of collection of the special tax in sufficient detail to allow each landowner or resident within the proposed district to estimate the maximum amount that he or she will have to pay.

How is the special tax reflected on the real property records?

The special tax is a lien on your property, essentially like a regular tax lien. The lien is recorded as a “Notice of Special Tax Lien” which is a continuing lien to secure each levy of the special tax.

How are Mello-Roos taxes affected when the property is sold?

for-sale-signThe Mello-Roos tax is assessed against the land, but is not based upon the value of the property, therefore, the possible increased value of the property does not affect the amount of the tax when property is sold. The amount of the tax may not exceed the original maximum amount stated in the Resolution of Formation. Any delinquent payments must be satisfied before the sale of the real property since the unpaid amounts are a lien against the property.

 

Keeping It In The Family: Parent to Child Transfer

Posted on by Emi Tsuji

California law provides for reassessment exclusion for real property transfers:

  • Between parent and child
  • From grandparent to grandchild.

The law is based upon two constitutional initiatives: Propositions 58 and 193. Collectively, they make it easier to keep property “in the family.”

Overview

In general, Proposition 58 states that real property transfers, from parent to child or child to parent, may be excluded from reassessment. Proposition 193 expands this tax relief to include transfers from grandparent(s) to grandchild(ren). In both cases, a claim must be filed within three years of the date of transfer to receive the full benefit of the exclusion.

Download a Guide to Propositions 58 and 193 suitable for presentation to your clients

Requirements & Guidelines

  1. The principal place of residence must have been granted a Homeowners’ Exemption or Disabled Veterans’ Exemption before the transfer. This residence need not be the new principal residence of the person that acquired the property.
  2. No limit is placed on the assessed value of a principal residence that may be excluded from reassessment.
  3. In addition to tax relief on the principal residence, you may claim an exclusion on transfers of other real property with an assessed value of up to $1,000,000.
  4. The $1,000,000 exclusion applies separately to each eligible transferor. A $2,000,000 limit applies to community real property of an eligible married couple.
  5. Transfers by sale, gift, or inheritance qualify for the exclusion.
  6. Transfers between parents and children as individuals, from grandparents to grandchildren as individuals, between joint tenants, from trusts to individuals, or from individuals to trusts may qualify for the exclusion. Transfers from grandchildren to grandparents are not eligible for this tax relief.
  7. Transfers of ownership interests in legal entities, aside from most trusts, do not qualify for the exclusion.
  8. A claim must be filed within 3 years after the date of purchase or transfer for which the claim is filed or prior to transfer to a third party, whichever is earlier, or within 6 months after the mailing of the notice of supplemental or escape assessment, issued as a result of the transfer for which the claim is filed. Untimely filed claims are subject to certain conditions, i.e., the property must not have transferred or resold to a third party and the claim will only apply to future tax years.
  9. If reassessment of your property occurs before the approval and processing of your timely filed claim, the reassessment may be reversed. In these situations, a corrected tax bill and/or a refund will be processed.

Transfer between Parent and Child

  1. The real property must be owned by the eligible transferor who is either the parent or child.
  2. You must be a parent or child. A child may be a son, daughter, son-in-law, daughter-in-law, stepchild, or child adopted before the age of 18.
    • Spouses of eligible children are also eligible until divorce or, if terminated by death, until the remarriage of the surviving spouse, stepparent, or parent-in-law.
  3. You must complete a Claim for Reassessment Exclusion for Transfer between Parent and Child form for a gift or purchase of real property between parent and child.

Transfer from Grandparent to Grandchild

  1. The real property must be owned by the eligible transferor who is the grandparent.
  2. You must be a grandchild whose parent(s) qualify as the deceased child(ren) of the grandparents as of the date of transfer, and you must be the decedent’s child.
  3. You must complete a Claim for Reassessment Exclusion for Transfer from Grandparent to Grandchild form for a gift or purchase of real property from grandparent to grandchild.

 

For expanded definitions of Propositions 58 & 193, see Revenue and Taxation (R & T) Code Section 63.1.

Frequently Asked Questions

 

  1. I recently inherited the family home, but I don’t really want to live there. Do I have to make it my principal residence to qualify for the Proposition 58 exclusion?

No.

  1. My parents just gave me their house that sits on ten acres of land. Isn’t there a limit for excluding the principal residence from reassessment?

Yes. Ten acres exceeds the amount of land necessary for a home site. In your case, only a reasonable amount of land would be considered part of the principal residence.

  1. I’m thinking of giving several properties to my children. Can I decide which child gets the exclusion?

The person who files first will get the exclusion.

  1. My two sisters and I recently bought several properties from our parents. Which one is entitled to the exclusion?

If you jointly own the properties with your sisters, you’ll have to decide that for yourselves. On the other hand, if three separate properties were transferred individually, the first eligible person who files a claim will get the exclusion.

  1. My grandfather gave me his house and seven commercial properties here in Southern California. How do you decide which properties will get the $1,000,000 exclusion?

Assuming you qualify for the exclusion, you must make that decision.