Mello-Roos Tax: What It Is, How It Works, How Long It Lasts
Investopedia / Ryan Oakley
What Is Mello-Roos?
A Mello-Roos is an ad hoc California tax district created to finance an infrastructure project. A district may be created only with the approval of two-thirds of voters and permits a special tax to be assessed on its residents. The state law allowing such districts was implemented in 1982 as a way for local governments to bypass the state's 1978 cap on property tax increases.[1]
The Mello-Roos tax law remains controversial. California developers have been known to advertise their newly-constructed houses as "No Mello-Roos!"
Key Takeaways
- A Mello-Roos is a special tax assessment district created in California to finance local infrastructure or services.
- The tax is applied only to residents of the district that benefit from the project.
- The law permitted Mello-Roos districts to raise money for local projects despite the restrictions of Proposition 13 property tax caps.
Understanding Mello-Roos
A Mello-Roos Community Facilities District (CFD) may be created by a city, county, or school district.
A Mello-Roos allows a local county, city government, or school district to sell bonds in order to finance a specific project or service. Projects permitted under California law range from infrastructure improvements to police and fire services, schools, parks, and childcare facilities.
The tax assessment may be charged until the bond debt issued for the district is repaid in full with interest. The payment of the tax is usually collected at the same time as the general property tax bill.
The Origins of Mello-Roos
The Mello-Roos tax is named after the sponsors of the law, California State Sen. Henry Mello and State Assemblyman Mike Roos.[2]
Their bill was a workaround for Proposition 13. That 1978 amendment to the California Constitution limits property taxes to 1% of assessed value and caps the rate of increase on the assessment to 2% per year.[3]
Important:Realtors must inform potential buyers if a home is in a Mello-Roos Community Facilities District.
The Mello-Roos tax is assessed against the land but is not based on the assessed value of the property. That is the way it gets around the cap imposed by Proposition 13.
Today, Mello-Roos is most often used to create infrastructure or support services in and around new developments. It also provides a way to make improvements in older and less affluent neighborhoods that are no longer bringing in enough property taxes to cover basic services.
Pros and Cons of Mello-Roos
Pros
Advocates of the Mello-Roos law say it makes new housing construction possible, and at a lower cost to the eventual buyers. A developer planning a large new community could either balk at the price of funding new infrastructure in and around the community or pass on the cost by raising the prices of the homes.
Additionally, Mello-Roos districts typically have newer homes and newer amenities. The infrastructure and services of a Mello-Roos community are well maintained and can increase the property value of a home. Mello-Roos communities often have lower crime rates and better school districts. And depending on the district, the Mello-Roos fees expire and no longer need to be paid.
Cons
Opponents point to the added tax burden on purchasing a home in a Mello-Roos district. This tax burden, they argue, makes it difficult to sell a home. These new homes also have homeowner's association fees, which further increase the cost of the home.
And lastly, Mello-Roos taxes generally are not deductible from federal taxes as they do not satisfy IRS requirements for the deduction.
Fine Print on Mello-Roos
The bond issued by a CFD is considered a lien against a property and failure to pay the tax can quickly result in foreclosure since Mello-Roos districts are subject to accelerated foreclosure laws.
Realtors are required by law to inform potential buyers if a home is in a CFD and thus is subject to a special tax assessment.
Mello-Roos taxes are usually listed as a line item on a property’s annual tax bill, though occasionally a district will send homeowners a separate bill. County assessors' offices maintain records of Mello-Roos districts.
How Long Do You Have to Pay Mello-Roos?
Depending on the district, Mello-Roos fees are paid until the bond is paid off. The length of time is typically between 20 to 25 years but can be as much as 40 years.
Does Mello-Roos Go Away?
Mello-Roos taxes may go away depending on the district. If an expiration date was determined when the district was created, then the taxes will expire at that time. If no expiration date was stipulated, Mello-Roos taxes may not go away.
Is the Mello-Roos Tax Only in California?
Yes, the Mello-Roos tax is only in California. It was created as an additional financial tool for local governments when legislation in the 1970s restricted local governments to finance public projects by raising real property taxes.
The Bottom Line
The Mello-Roos tax in California was created to circumvent legislation that put restrictions on increasing property taxes. The purpose of Mello-Roos is to contribute to the general costs of a residential district: infrastructure improvements, police and fire services, schools, parks, and childcare facilities.
Mello-Roos is a divisive tax in California and only some districts come with the tax. Depending on a property buyer's requirements, Mello-Roos can be beneficial or negatively impactful. There are pros and cons that come with the tax, depending on the buyer's needs.
