Frequently Asked Questions - Understanding the Real Estate Tax Deduction

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How has FTB’s guidance changed?

In November of 2011, we initiated an educational campaign to provide guidance on the real estate tax deduction, based on IRS instructions that stated that deductible real estate taxes must be ad valorem.

We want to thank the tax professional community who followed our guidance and made the recommended adjustments on their clients’ tax returns.

The IRS Office of Chief Counsel has since provided clarification (see IRS Information Letter 2012-0018) that non-ad valorem assessments may be deductible in certain circumstances if they meet the following requirements:

  • The real property taxes must be levied for the general public welfare; and
  • At a like rate against all real property in the taxing authority’s jurisdiction

The IRS Information letter further states that amounts assessed only on specific properties for a local benefit (such as for streets, sidewalks, and like improvements) cannot be deducted as real property taxes.

Although, taxpayers are permitted a deduction to the extent they can show the portion of the local benefit assessments that were imposed to repair, maintain, or meet interest charges for these local benefits.

The IRS Information Letter also indicated that the IRS Office of Chief Counsel will recommend revisions to the federal forms and publications on this subject.

Taxpayers who limited the real estate tax deduction to the ad valorem amounts in response to our guidance and have determined that they under-deducted their taxes, may request a refund by using one of the methods provided below. Pending further clarification through updated forms and instructions from the IRS, you may want to wait before filing an amended 2011 federal and/or California tax return.

Can FTB compute the adjustment for me?

We do not have sufficient information to compute this adjustment for you.

How can I get a refund?

There are two methods to request a refund if you wish to revise your California tax return to the extent you did not originally deduct real estate taxes that satisfy the requirements described above.

Method 1

You or your tax preparer may use FTB Form 540X Amended Individual Income Tax Return and follow the related instructions along with the following streamlined amended return submission process to request a refund for only this issue:

  • Prepare FTB Form 540X to claim an increased deduction for real estate property taxes deducted as a California itemized deduction.
  • Write “REAL ESTATE TAX DEDUCTION” in red ink at the top of your completed Form 540X.
  • Under explanation of changes, write “Additional property taxes not deducted on original return”
  • Attach only copies of your original and revised federal Schedule A (Form 1040), Itemized Deductions. If you do not have copies to attach, then simply include the amounts reported on line 6 of your original and revised federal Schedule A under the explanation of changes.
  • Sign and mail your completed Form 540X to the address included on the form.

We will expedite your amended tax return and issue a refund with interest within 90 days.

Important - If you have already filed an amended tax return to revise your real estate tax deduction, there is no need to file another amended tax return following these procedures.

To amend your 2011 federal tax return, follow the IRS instructions.

Method 2

As an alternative to filing an amended Form 540X, you may request a refund in a written letter and follow these steps:

  • Include your name, address, social security number, and signature
  • Write “REAL ESTATE TAX DEDUCTION” in red ink at the top of your letter.
  • Include your original and amended federal Schedule A (Form 1040).
  • Mail to:  Franchise Tax Board, PO Box 942840, Sacramento, CA 94240-0002.

While we will handle these as high priority refund requests, those filed by written letter may take longer to process depending on the volume received.  Interest rules will apply to your refund request.  

Important – If you have already filed an amended tax return to revise your real estate tax deduction, there is no need to request a refund following these procedures.

To amend your 2011 federal tax return, follow the IRS instructions.

How do I determine what amounts are deductible and nondeductible real estate property taxes?

The IRS provides guidance on deductible and nondeductible amounts in the following federal publications.

Note: These federal publications have not yet been updated to apply the revised determination of deductibility described in IRS Information Letter 2012-0018.