New Guidance on Real Estate Tax Deduction | Commercial Property ...

By Lori Shrout, EA,
Manager, Gumbiner Savett Inc.

The California Franchise Tax Board has decided that parcel numbers will not be required to be reported on individual tax returns after it had previously announced the would be ? in an attempt to ensure that only the deductible portion of real estate tax was being reported.

There has been much confusion in determining what portion of your property tax bill is and is not deductible. The FTB conforms to federal law with respect to the deduction for real property taxes. The IRS instructions for 1040, Schedule A, advise to deduct taxes paid on real estate ?but only if the taxes are based on the assessed value of the property.? Accordingly, the FTB began a campaign to educate taxpayers and preparers that they could only deduct taxes that are assessed as a percentage of a property?s value, known as ad valorem taxes.

After an uproar from the preparer community, the FTB wrote a letter to the IRS requesting clarification on the matter.? The Office of the Chief Counsel responded and clarified that real property taxes may be deductible even though they are not imposed on an ad valorem, or assessed value, basis.

According to that letter, taxes that are not ad valorem could be deductible, but ?must be levied for the general public welfare at a like rate against all properties in the taxing authority?s jurisdiction.? In other words, the assessment must not be for improvements that benefit only specific properties, items like adding street lights and new sidewalks would not be deductible.

The letter also states that the Office of the Chief Counsel will recommend that the IRS revise instructions and publications on the subject, to agree with the new guidance. This is good for many California taxpayers who may have a significant portion of their property taxes that are not imposed on an ad valorem basis ? Mello-Roos properties are one example.

The good news for California residents is that the FTB for now will not be requiring more detailed reporting on property taxes. The FTB has decided to wait for the revisions to the IRS forms and publications, and then will provide revised California forms and instructions that are consistent with the revisions made by the IRS.

Lori Shrout is a manager at Gumbiner Savett Inc., one of the largest CPA and business advisory firms in Southern California.

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