June 25, 2012
California Real Estate Tax Deductions: FTB Issues New Guidance
In November 2011, the California Franchise Tax Board (FTB) began an initiative to educate taxpayers on real estate tax deductions for personal income taxes. The goal of the educational campaign was to instruct taxpayers on how to calculate the allowable real estate property tax deduction as an itemized deduction. The FTB originally advised taxpayers and tax preparers that real estate taxes must be ad valorem to be deductible. This means that only taxes that are assessed according to the value of the property are deductible. Since California conforms to federal law for real property tax deductions, this guidance was based on the IRS forms and publications regarding the matter.
The FTB wrote to the IRS Office of Chief Counsel in December 2011 requesting clarification on circumstances under which real property taxes are deductible for federal income tax purposes. In response to the request, the IRS has recently issued a response letter (IRS Information Letter 2012-0018) stating that certain portions of the federal tax forms and instructions should be revised to more accurately reflect the position of the IRS on this issue.
Contrary to current federal instructions, non-ad valorem real property tax assessments may be deductible under certain circumstances. Specifically, they are 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. However, real property taxes which are specifically for a local benefit (e.g. streets, sidewalks, and similar improvements) cannot be deducted.
Taxpayers who limited their real estate tax deduction in response to the FTB's prior guidance may request a refund using one of two methods. Under the first method, the taxpayer may filed an amended individual tax return using Form 540X and write "REAL ESTATE TAX DEDUCTION" in red ink at the top of the completed form along with an attached copy of the original and revised federal Schedule A. Under the second method, the taxpayer may request a refund in a written letter and include the taxpayer's name, address, social security number, and signature. The letter must include "REAL ESTATE TAX DEDUCTION" written in red ink at the top and have attached the taxpayer's original and revised federal Schedule A. The letter should be mailed to the Franchise Tax Board, P.O. Box 942840, Sacramento, CA 94240-0002.
Should you have any questions regarding this potential refund opportunity, contact your Marcum Tax Advisor.