ABOUT MELLO-ROOS

ITS HISTORY                                                                                                                                  When California Proposition 13 passed in 1978, it severely limited the ability of local governments to use property taxes for the construction and improvement of public facilities and services. As a result, Californians were forced to seek an alternative means of funding for such needed public improvements and services.

 Finally, in 1982, the Community Facilities District Act (CFD) was enacted by the California State Legislature. It has since been known as Mello-Roos; made up from the last names of its co-authors, Senator Henry Mello of the Monterey California area and Los Angeles California Assemblyman Mike Roos.

DISTRICTS AND TAXES

A Mello-Roos District is an area where a special property tax on real estate, in addition to the normal property tax, is imposed on those real property owners within a Community Facilities District. These districts seek public financing through the sale of bonds for financing public improvements and services.  These services may include streets, water, sewage and drainage, electricity, infrastructure, schools, libraries, parks and recreation facilities, police, fire and paramedic stations and protection to newly developing communities. The tax paid is used to make the payments of principal and interest on the bonds.

Mello-Roos are generally not tax-deductible. For example, Mello-Roos taxes cannot be deducted if they are assessed to fund local benefits and improvements that tend to increase the value of your property.  Mello roos taxes may appear on annual county property tax bill with other deductible property taxes.  What this means is that you may only be able to deduct a portion of the total property tax shown on your bill.

Generally, homes built prior to 1990 have no Mello Roos assessments, while many newer homes in the same city do have Mello Roos assessments.

 NEW COMMUNITIES

Many communities requiring new schools and infrastructures such as public parks and roads impose Mello-Roos. While property tax is assessed as a percentage of the value of the home, Mello-Roos is independent; there is no "standard calculation", this assessment could increase or decrease over time and is not subject to Proposition 13.

MELLO-ROOS CHARGES AND PAYMENTS                                                                                       By law (Prop. 13), the Special Tax cannot be directly based on the value of the property. Special Taxes instead are based on mathematical formulas that take into account property characteristics such as use of the property, square footage of the structure and lot size. The formula is defined at the time of formation, will include a maximum special tax amount and a percentage maximum annual increase.

Mello-Roos is billed and due bi-annually. The amount you owe appears on your property tax statement as a separate line item.

THE DURATION OF MELLO-ROOS ASSESSMENTS                                                                             Mello-Roos taxes may be levied only as long as they are needed to pay off the bonds for which you were assessed; averaging between 15 to 40 years and varies with each community. In some cases, districts have the right the right to renew a Mello-Roos assessment where needed.

WAYS TO FIND THE MELLO-ROOS ASSESSMENT ON A PROPERTY

• The listing broker/agent may have included this on the property detail sheet, if not--
• Your Agent can easily look up this information to you, or even yet--
• If you have the property address or the parcel number, access the Orange County Property Tax website at: http://tax.ocgov.com/tcweb/search_page.asp and follow the prompts

A FEW THINGS TO KEEP IN MIND WHEN LOOKING TO BUY A PROPERTY SUBJECT TO MELLO-ROOS ASSESSMENT

• Mello-Roos Assessments fall under Rights to Accelerated Foreclosure. The CFD has the right (and if bonds are issued, the obligation) to foreclose on property when special taxes are delinquent for more than 90 days. Additionally, any costs of collection and penalties must be paid by the delinquent property owner. This is considerably faster than the standard 5-year waiting period on county ad valorem taxes.

• Disclosure Requirement for Sellers (California Civil Code §1102.6). When reselling a property in a CFD, the seller must make a "good faith effort" to obtain a Notice of Special Tax from the local agency levying the tax, and provide it to the buyer.

• When financing a home purchase, qualifying ratios are affected by a Mello-Roos Assessment.

• Verify the duration of the Mello-Roos Assessment and the potential for a future increase.

• Proposition 13 does not restrict Mello-Roos Assessments.

• Mello-Roos Taxes may not be deductible on your personal income tax return.

Note: This information is meant to provide some basics and is believed to be accurate but not guaranteed. Use this information only to gain a basic understanding of Mello-Roos assessments, and not as everything one should or needs to know.  For further information and verification regarding Mello-Roos Assessments, contact a tax professional, a governmental tax agency, your Mello-Roos District or obtain Internal Revenue Service Publication 17, Your Federal Income Taxes-Individuals, Chapter 24.

 For more website information visit STATE OF CALIFORNIA FRANCHISE TAX BOARD at: www.ftb.ca.gov/individuals/faq/net/909/.shtml, or CALIFORNIA TAX DATA at: www.mello-roos.com/pdf/mrpdf.pdf.

INTRODUCTION TO 1031 EXCHANGES

A 1031 Exchange (Tax-Deferred Exchange) Is One Of The Most Powerful Tax Deferral Strategies Remaining Available For Taxpayers. Anyone involved with advising or counseling real estate investors should know about tax-deferred exchanges, including Realtors, lawyers, accountants, financial planners, tax advisors, escrow and closing agents, and lenders. Taxpayers should never have to pay income taxes on the sale of property if they intend to reinvest the proceeds in similar or like-kind property. The Advantage of a 1031 Exchange is the ability of a taxpayer to sell income, investment or business property and replace with like-kind replacement property without having to pay federal income taxes on the transaction. A sale of property and subsequent purchase of a replacement property doesn't work; there must be an Exchange. Section 1031 of the Internal Revenue Code is the basis for tax-deferred exchanges. The IRS issued "safe harbor" Regulations in 1991, which established approved procedures for exchanges under Code Section 1031. Prior to the issuance of these Regulations, exchanges were subject to challenge under examination on a variety of issues. With the issuance of the 1991 Regulations, tax-deferred exchanges became easier, affordable and safer than ever before.

The Disadvantages of a Section 1031 Exchange include a reduced basis for depreciation in the replacement property. The tax basis of replacement property is essentially the purchase price of the replacement property minus the gain, which was deferred on the sale of the relinquished property as a result of the exchange. The replacement property thus includes a deferred gain that will be taxed in the future if the taxpayer cashes out of his investment.

Exchange Techniques. There is more than one way to structure a tax-deferred exchange under Section 1031 of the Internal Revenue Code. However, the 1991 "safe harbor" Regulations established procedures which include the use of an Intermediary, direct deeding, the use of qualified escrow accounts for temporary holding of "exchange funds" and other procedures which now have the official blessing of the IRS. Therefore, it is desirable to structure exchanges so that they can be in harmony with the 1991 Regulations. As a result, exchanges commonly employ the services of an Intermediary with direct deeding.

Exchanges can also occur without the services of an Intermediary when parties to an exchange are willing to exchange deeds or if they are willing to enter into an Exchange Agreement with each other. However, two-party exchanges are rare since in the typical Section 1031 transaction, the seller of the replacement property is not the buyer of the taxpayer's relinquished property.

THE BASIC RULES OF 1031 EXCHANGES

1. The Relinquished Property Must Be Qualifying Property. Qualifying property is property (or equipment) held for investment purposes or used in a taxpayer's trade or business. Investment property includes real estate, improved or unimproved, held for investment or income producing purposes. Property used in a taxpayer's trade or business includes his office facilities or place of doing business, as well as equipment used in his trade or business. Real estate must be replaced with like-kind real estate. Equipment must be replaced with like-kind equipment.

3. Replacement Property Title Must Be Taken In The Same Names As The Relinquished Property Was Titled. If a husband and wife own property in joint tenancy or as tenants in common, the replacement property must be deeded to both spouses, either as joint tenants or as tenants in common. Corporations, partnerships, limited liability companies and trusts must be in title on the replacement property the same as they were on the relinquished property.

4. The Replacement Property Must Be Like-Kind. For real estate exchanges, like-kind replacement property means any improved or unimproved real estate held for income, investment or business use. Improved real estate can be replaced with unimproved real estate. Unimproved real estate can be replaced with improved real estate. A 100% interest can be exchanged for an undivided percentage interest with multiple owners and vice versa. One property can be exchanged for two or more properties. Two or more properties can be exchanged for one replacement property. A duplex can be exchanged for a fourplex. Investment property can be exchanged for business property and vice versa. However, as referenced above, a taxpayer's personal residence cannot be exchanged for income property, and income or investment property cannot be exchanged for a personal residence, which the taxpayer will reside in.

5. Any Boot Received In Addition To Like Kind Replacement Property Will Be Taxable (to the extent of gain realized on the exchange). This is okay when a seller desires some cash or debt reduction and is willing to pay some taxes. Otherwise, boot should be avoided in order for a 1031 Exchange to be completely tax free.

The term "boot" is not used in the Internal Revenue Code or the Regulations, but is commonly used in discussing the tax consequences of a Section 1031 tax-deferred exchange. Boot received is the money or the fair market value of "other property" received by the taxpayer in an exchange. Money includes all cash equivalents plus liabilities of the taxpayer assumed by the other party, or liabilities to which the property exchanged by the taxpayer is subject. "Other property" is property that is non-like-kind, such as personal property received in an exchange of real property, property used for personal purposes, or "non-qualified property." "Other property" also includes such things as a promissory note received from a buyer (Seller Financing).

A Rule Of Thumb for avoiding "boot" is to always replace with property of equal or greater value than the relinquished property. Never "trade down." Trading down always results in boot received, either cash, debt reduction or both. Boot received is mitigated by exchange expenses paid. See The Rules Of Boot In A Section 1031 Exchange (below) for a detailed explanation of these rules.

The Basic Types Of Exchanges

A Simultaneous Exchange is an exchange in which the closing of the relinquished property and the replacement property occur on the same day, usually back-to-back. There is no interval of time between the two closings. This type of exchange is covered by the Safe harbor Regulations.

A Delayed Exchange is an exchange where the replacement property is closed on at a later date than the closing of the relinquished property. The exchange is not simultaneous or on the same day. This type of exchange is sometimes referred to as a "Starker Exchange" after the well known Supreme Court case in which ruled in the taxpayer's favor for a delayed exchange before the Internal Revenue Code provided for such exchanges. There are strict time frames established by the Code and Regulations for completion of a delayed exchange, namely the 45-Day Clock and the 180-Day Clock (see detailed explanation below). Delayed exchanges are covered by the Safe harbor Regulations.

A Reverse Exchange (Title-Holding Exchange) is an exchange in which the replacement property is purchased and closed on before the relinquished property is sold. Usually the Intermediary takes title to the replacement property and holds title until the taxpayer can find a buyer for his relinquished property and close on the sale under an Exchange Agreement with the Intermediary. Subsequent to the closing of the relinquished property (or simultaneous with this closing), the Intermediary conveys title to the replacement property to the taxpayer. The IRS has issued new safe harbor guidance on Reverse Exchanges (see below).

An Improvement Exchange (Title-Holding Exchange) is an exchange in which a taxpayer desires to acquire a property and arrange for construction of improvements on the property before it is received as replacement property. The improvements are usually a building on an unimproved lot, but also include enhancements made to an already improved property in order to create adequate value to close on the Exchange with no boot occurring. The Code and Regulations do not permit a taxpayer to construct improvements on a property as part of a 1031 Exchange after he has taken title to property as replacement property in an exchange. Therefore, it is necessary for the Intermediary to close on, take title and hold title to the property until the improvements are constructed and then convey title to the improved property to the taxpayer as replacement property. Improvement Exchanges are done in the context of both Delayed Exchanges and Reverse Exchanges, depending on the circumstances. The IRS has issued new safe harbor guidance on Reverse Exchanges (including title-holding exchanges for construction or improvement).

1031 CORPORATION An Exchange Company Specializing in Tax-Deferred Exchanges since 1990. For More Information: Call (888) 367-1031 Toll Free  - Or Visit: www.1031cpas.com

PROPOSITION 60/90  -

PROPERTY TAX BREAKS FOR SENIORS

Under Proposition 90, California property owners who are 55 years or older may be able to qualify to transfer the assessed valued of their principal residence sold in County "A" to their new residence in County "B".

County Assessors will require a copy of the tax bill from the other county and a copy of the applicant's birth certificate to be included with the application.  Also, include a copy of the Grant Deed for the new purchase and a copy of the closing statements of both the sale and purchase.

SUMMARY OF ELIGIBILITY REQUIREMENTS

• The seller of the original residence, or a spouse residing with the seller, must be at least 55 years of age, as of the date that the original property is transferred.
• The replacement property must be of equal or lesser "current market value" than the original.
• The base year value of the original property cannot be transferred to the replacement dwelling until the original property is sold.
• The replacement property must be purchased or newly constructed within  two years (before or after) of the sale of the original property.
• The owner must file an application within three years following the purchase date or new construction completion date of the replacement property.
• This is a one-time only filing. Proposition 60/90 relief cannot be granted if the claimant or spouse was granted relief in the past.
• Proposition 60/90 relief includes, but is not limited to: single family residences, condominiums, units in planned unit developments, cooperative housing, corporation units or lots, community apartment units, mobile homes subject to local real property tax, and owners' living premises which are a portion of a larger structure.
• The taxpayer is not eligible for the tax relief until they actually own AND occupy the replacement dwelling as their principle residence.

IMPORTANT NOTE: Contact from the list below, the co-operating County in question in order to verify that they are currently accepting the value transfer under Proposition 60/90 and find out what their specific qualification requirements are:

COUNTY                                PHONE 

Alameda                                 415.272.3755

Los Angeles                           312.974.3101

Orange                                   714.834.2746

San Diego                              619.531.5507

San Mateo                             415.363.4500

Santa Clara                            408.299.4347

Ventura                                   805.654.2181             

For all other California counties not listed above, you may contact the Property Tax Office in Sacramento by calling 916.445.4982.