What is Mello-Roos? The ultimate guide to understanding this California tax law

Many California residents and business owners see the Mello-Roos special assessment tax as either a fact of life or an emotional stronghold. While often controversial due to limited transparency for home buyers, when it originated, Mello-Roos offered communities a way to raise funds that they wouldn't otherwise have to build or enhance their amenities. This article explores what Mello-Roos is and how it may affect you.

What is Mello-Roos?

Mello-Roos is a California special tax district that sells bonds and levies taxes to fund new or additional community facilities and services within specific boundaries.

Each special tax district is called a Community Facility District (CFD). Voters within each CFD must pass by a super-majority (2/3 approval), which gives it the ability to sell bonds to raise money to fund public improvements such as roads, schools, parks, police services, and other amenities desired by the community. It also provides the CFD with taxing authority on district residents when the tax is used to pay off the bond principal, interest, and administrative fees.

What does Mello-Roos mean?

Today, the term Mello-Roos is most often used to refer to the special assessment taxes charged to CFD residents.

The name Mello-Roos comes from the names of the two sponsors of the California legislation that created CFDs with bonding and taxing authority, California State Senator Henry Mello and State Assemblyman Mike Roos.

Why are Mello-Roos taxes allowed?

The Mello-Roos Community Facilities Act of 1982 (passed in 1983) was a workaround to Proposition 13 and was a new method for local governments and organizations to raise money to fund their infrastructure. CFDs are assessed equally across all properties in the district, rather than being based on the property's value, so Proposition 13 restrictions do not apply to them.

In 1978, California voters approved Proposition 13, which restricted local governments from increasing property taxes by imposing property tax limits on the base value of properties and reducing the tax rate. This led to new developments and existing communities not having a way to fund new or additional services and facilities.

What are Mello-Roos fees?

Mello-Roos fees are another name for the special assessments (or taxes) levied by counties on behalf of the CFDs that the businesses and residents approved.

Is it worth paying Mello-Roos?

Homebuyers should understand all the costs involved in purchasing and owning a home. Sellers and real estate agents are required to share information about Mello-Roos costs with prospective buyers to ensure they understand the expense involved.

That said, if buyers like and can afford the community facilities and services that Mello-Roos CFDs provide, then they may feel it is worth buying a home that has a Mello-Roos tax assessed on it. Some buyers feel having Mello-Roos CFDs help to maintain the investment value of the property. Other buyers oppose the Mello-Roos funding concept or may not be able to afford the additional costs. They may not feel that it is worth the additional expense and would prefer to buy elsewhere.

How long do I pay Mello-Roos?

Mello-Roos special assessments typically last 20 to 25 years but are allowed by law to extend up to 40 years. You will pay Mello-Roos fees until the bonds that were initially purchased are paid off.

What Is the Purpose of Mello-Roos?

The purpose of Mello-Roos is to pay for community infrastructure within a CFD. The use of the taxes is specified in the formation documents and can be for a wide variety of facilities and services such as schools, museums, parks, hospitals, police protection, any number of amenities that the voters approve to fund within their district.

How much are Mello-Roos taxes?

When Mello-Roos CFDs are formed, the formation documents outline the exact duration of the tax, the total cost to the taxpayers, its purpose, and the method used to distribute the tax burden equally among all residents. Homes and businesses may have no tax, a small, or a very significant amount of Mello-Roos tax. Also, be aware that multiple CFDs may apply to a single property.

How do Mello-Roos taxes work?

After a CFD is created and bonds are sold to cover the expense of the improvements, the Mello-Roos special assessments are included within the property tax bills of all residents within the district.

The Mello-Roos tax amounts may adjust from year to year due to inflation, deflation, or changes in the number of properties in the district. If many payments are not made, the remaining residents paying the taxes may need to carry the additional burden by having their rates increased to satisfy the bond and interest costs.

Once the bonds have been paid off, the County Assessor is notified, and the charges will be removed from future property tax invoices. Property owners should understand that if a CFD is not paid, the CFD itself can file a judicial foreclosure that could force the sale of the property if the past due payments are not paid.

How is Mello-Roos calculated in California?

Mello-Roos taxes are spread equally among all residences and properties within the CFD. Some CFDs calculate their charges based on square footage of homes and frontage areas of businesses. Others may assess the amounts due based on parcel size or other factors. The sum of the bond, interest, and administrative expenses anticipated for the upcoming year are divided and charged to each property using the method specified. Proposition 13 prevents assessing the charge based on the value of the property.

Is Mello-Roos tax-deductible in California?

No, Mello-Roos taxes are not tax-deductible on California income tax returns. Very rare situations may exist, but California tax law does not exempt non-ad valorem taxation—meaning that taxes or assessments that are not based on the value of the home are not tax-deductible. Mello-Roos bonds are not based on the assessed value of the properties.

Can I write off Mello-Roos taxes?

No, you cannot write off Mello-Roos taxes, although very rare situations may exist. Two factors prevent it from being able to be deducted as a property tax on Federal tax returns.

1. IRS Topic 503 Deductible Taxes stipulates that taxpayers cannot deduct local taxes for improvements.
2. The IRS defines deductible property taxes as being based on the value of the real property. Mello-Roos taxes are specifically not based on property value, so they are not deductible.

What is the difference between Mello-Roos and special assessments?

Mello-Roos is a type of special assessment. Other special assessments also exist, such as special taxes, direct levies, and charges for delinquent county bills.

How much can Mello-Roos increase?

Mello-Roos is restricted by law not to exceed 2% per year.

Why is Mello-Roos controversial?

Sellers did not always tell buyers that a property was in a Mello-Roos district, which sometimes caused them considerable financial hardship. When buying a home in California, specifically asking realtors about Mello-Roos is important if they do not bring it up themselves.

Steps you can take

To investigate on your own, you can look up the parcel number with the county recorder and look up county tax records to see if prior tax bills have included Mello-Roos. Also, consider checking the foreclosure rate on homes in the district to assess whether there may be rate increases in the future. Contact the specific CFDs with additional questions. You can find their phone numbers on tax bills and with the county recorder, controller, or auditor.