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Understanding the Real Estate Tax Deduction

In November of 2011, FTB kicked off the Real Estate Tax Deduction Educational Campaign to help educate taxpayers and tax preparers on how to calculate the allowable real estate property tax deduction as an itemized deduction. California conforms to federal law for the deductibility of real property taxes. As part of this effort and in response to some conflicting information provided by the IRS regarding the deductibility of real property taxes that were not assessed on an ad valorem basis, the FTB wrote to the IRS in December 2011 requesting clarification on circumstances under which real property taxes are deductible for federal income tax purposes as an itemized deduction.  A copy of that letter is provided here. In response to this request, the IRS has issued a letter stating that certain portions of their current forms and instructions should be revised to more accurately reflect the position of the IRS on this issue.  A copy of that response is also provided here. Specifically, contrary to current federal instructions, the IRS has clarified that real property taxes may be deductible even though they are not imposed on an ad valorem (assessed value) basis. Specifically, the IRS has stated that:

Assessments on real property owners, based other than on the assessed value of the property, may be 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, and if the assessments are not for local benefits (unless for maintenance or interest charges).

The letter goes on to state that appropriate revisions to the IRS forms and publications on the subject will be recommended.

Under current law, the deductibility of real property taxes is generally a matter of federal law to which California conforms. As such, the FTB will be waiting to review the revisions to the IRS forms and publications to provide comparable revisions to California tax form instructions.  The FTB does not anticipate that these revisions will be made prior to the due date for 2011 tax returns (April 17, 2012). We have removed material from our website that limits the deductibility of real property taxes to taxes imposed on an ad valorem basis. Once the IRS forms and instructions are revised, we will provide revised California forms and instructions that are consistent with the revisions made by the IRS.

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.

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