Mello-Roos Tax: What You Need to Know

Hey there California homeowners and house hunters! Chances are, you’ve heard of this thing called the “Mello-Roos tax” or “community facilities district tax.” It’s a sneaky type of tax that can seriously impact your property taxes, so it’s super important to know about it if you’re thinking of buying or owning a home in certain parts of the Golden State. 

In this article, we’re going to break down everything you need to know about the Mello-Roos tax, what it is, how it works, and how it can affect you as a homeowner. So, if you want to stay in the know about this crucial aspect of California property ownership, keep reading.

What Is Mello-Roos Tax

Mello-Roos is a special tax assessed on property owners in California to finance infrastructure projects, services, and facilities within a specific district. The tax is named after the sponsors of the law, California State Senator Henry Mello and State Assemblyman Mike Roos. The law was implemented in 1982 as a way for local governments to get around the cap on property tax increases that had been put in place in 1978. A Mello-Roos Community Facilities District (CFD) may be created by a city, county, or school district and allows them to sell bonds to finance a specific project or service.

What Is the Origin of Mello-Roos?

The Mello-Roos tax law was introduced as a workaround for Proposition 13, an amendment to the California Constitution passed in 1978 that limits property taxes to 1% of assessed value and caps the rate of increase on the assessment to 2% per year. 

What Is the Purpose of Mello-Roos?

Mello-Roos provides a way for local governments to finance infrastructure projects, services, and facilities within a specific district. Projects permitted under California law range from infrastructure improvements to police and fire services, schools, parks, and childcare facilities. A Mello-Roos Community Facilities District (CFD) may be created by a city, county, or school district and allows them to sell bonds to finance a project or service.

Why Are Mello-Roos Taxes Allowed?

The idea behind these taxes is to work around the 1978 cap on property tax increases. To make up for this shortfall, Mello-Roos Community Facilities Districts (CFDs) were created. These taxes are allowed because they do benefit the district and better the community. 

How Do Mello-Roos Taxes Work?

When a Mello-Roos Community Facilities District (CFD) is created, the local government sells bonds to fund the project or service, and residents within the district are assessed a special tax to help repay the bond debt with interest.

The assessment is typically based on the value of the property and the amount of the bond debt, which means that properties with higher values generally pay higher assessments. Homebuyers should be informed by the seller if a property is subject to Mello-Roos taxes, and they can also check with the local government or the county tax assessor’s office to find out if a property is located in a CFD.

Mello-Roos taxes are typically due annually along with property taxes, but the exact due date can vary depending on the district and the local government’s policies. It’s important to pay them on time to avoid penalties and interest charges.

It’s also possible for Mello-Roos taxes to change over time, depending on the bond debt and the needs of the district. However, any changes should be communicated to residents in advance and comply with state and local laws.

How Is Mello-Roos Calculated in California?

Mello-Roos taxes in California are calculated based on a specific formula that considers different factors, such as:

  • Amount of debt that needs to be repaid
  • Interest rate on the debt
  • Number of years over which the debt will be repaid

The exact method of calculation can differ depending on the district and the project being funded.

For example, if the local government decides to build a new school in a specific location, they may create a Mello-Roos district to raise the necessary funds. The tax amount may be determined by the size or value of the property, or it may be a flat rate applied to all properties in the district.

Advantages of Mello-Roos

Supporters of the Mello-Roos law argue that it can make new housing construction more feasible and reduce costs for future home buyers. Without this option, developers of large new communities might struggle with funding new infrastructure in and around the community or might be forced to increase home prices to cover these costs.

Mello-Roos districts generally feature newer homes and amenities with well-maintained infrastructure and services that can raise property values. Homeowners living in Mello-Roos communities may also benefit from lower crime rates and better school districts. Depending on the specific district, Mello-Roos fees may eventually expire, so homeowners would no longer be required to pay them.

Disadvantages of Mello-Roos

In a Mello-Roos district, homeowners face added tax burdens, which can make it harder to sell their homes. These taxes are on top of any homeowner’s association fees, only further adding to the cost of owning a home in such a community. Another disadvantage is that Mello-Roos taxes are generally not tax-deductible on federal tax returns and increase the financial burden for homeowners.

It’s also important to note that the bond issued by a CFD is considered a lien against the property. If you don’t pay your Mello-Roos taxes, it can quickly lead to foreclosure since Mello-Roos districts are subject to accelerated foreclosure laws. So, before purchasing a home in a Mello-Roos district, it’s crucial to understand the financial obligations and to ensure that you can afford the additional taxes and fees.  

Planning for Mello-Roos Tax

Although the Mello-Roos tax may not be everyone’s cup of tea, it has helped many communities across California. Let’s face it, taxes are about as enjoyable as a root canal. But just like a root canal, sometimes you need a little pain to get the job done.

Thankfully, you can turn to doola to make managing your finances a little less painful. With doola, you can manage your finances, keep track of expenses, and file your taxes with ease. 

doola's website is for general information purposes only and doesn't provide official law or tax advice. For tax or legal advice we are happy to connect you to a professional in our network! Please see our terms and privacy policy. Thank you and please don't hesitate to reach out with any questions.

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