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Franchise Tax Board Updates Guidance on Real Estate Tax Deductions

We issued new guidance to taxpayers who deduct real estate taxes on their state and federal returns. The IRS recently issued IRS Information Letter 2012-0018 providing further guidance in determining what a deductible real estate tax is. California tax law follows federal tax law in this area, which makes IRS guidance applicable for state tax purposes.

Real estate taxes based on the assessed value (ad valorem) of the property are generally deductible. The IRS information letter explains that contrary to information in its current forms and publications, assessments based on other than the assessed value of the property may be deductible in certain circumstances 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, 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. Taxpayers are permitted a deduction for the portion of the local benefit assessments that were imposed to repair, maintain, or meet interest charges for these local benefits.

In November 2011, we kicked off an education campaign to help taxpayers and tax preparers calculate the allowable real estate property tax deduction as an itemized deduction. As part of this effort and in response to some conflicting information regarding the deductibility of real estate taxes not assessed on an ad valorem basis, we wrote to the IRS Chief Counsel in December 2011 requesting clarification. The IRS Office of Chief Counsel issued a letter stating that there is no ad valorem requirement in the law regarding real estate tax deductibility and that certain portions of their current forms and instructions should be revised to more accurately reflect the IRS’ position. To view a copy of our Chief Counsel’s letter and the IRS’ response, visit ftb.ca.gov and search for real estate tax.

We removed the material that limits the deductibility of real estate taxes to those imposed on an ad valorem basis from our website. We are also revising tax form instructions to reflect this update. We will review the IRS’ revisions to their forms and publications to provide comparable changes to California tax form instructions. We do not anticipate that these revisions will be made prior to the 2011 tax return due date.

At this time, we do not plan to add additional reporting requirements related to the real estate tax deduction beginning with the 2012 tax return.

Back to May 2012 Tax News