What is Mello-Roos tax anyways?

What is Mello-Roos Tax anyways? We keeping hearing about them but what are they? Why are they in place? What is thier impact on my purchase and why should I want to pay them?

The Community Facilities District Act (more commonly known as Mello-Roos) was a law enacted by the California State Legislature in 1982.The name Mello-Roos comes from its co-authors, Senator Henry Mello (of the Monterey area) and Assemblyman Mike Roos (of Los Angeles). The Act enabled “Community Facilities Districts” (CFDs) to be established by local government agencies as a means of obtaining COMMUNITY FUNDING (that would be you!)

History

When California Prop 13 passed in 1978, it restricted the ability of local governments to raise property taxes by more than an inflation factor. The budget for services and for the construction of public facilities therefore could not continue unabated. As a result, new ways to fund public improvements in respective locales were considered.

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 (you!) within a Community Facilities District. These districts seek public financing through the sale of bonds for the purpose of financing public improvements and services. These services may include streets, water, sewage and drainage, electricity, infrastructure, schools, parks and police protection to newly developing areas. The tax paid is used to make the payments of principal and interest on the bonds.

Mello-Roos is tax deductible in some cases but not in others.

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 and could rise or lower and is not subject to Proposition 13.

 

So What does it mean in Orange County

 

So what is Mello-Roos Tax in Orange County? It's an additional tax imposed on homeowners in a specific area, generally newer communities (ex: San Clemente's TALEGA, Ladera Ranch, Aliso Viejo, Newport Coast, Foothill Ranch and Irvine) with needs for new parks, schools, libraries etc...some older areas such as Rancho Santa Margarita and Coto De Caza have expiring Mello Roos taxes? Mello Roos taxes do not last forever! Once the bonds are paid back, the mello roos tax expires.

Is Mello Roos tax always the same? No! It varies by area and by the amount of the bond taken out by the city. The typical range of increased tax is .3% to .8% and can vary in areas by as much as being seperated by a bridge! 

Here is an example of two homes with and without Mell Roos Taxes, as follows:

Without: $500,000 home value at standard 1.0125% tax rate equals annual taxes due of $5062.50

With: $500,000 home valye at standard 1.0125% tax plus mello roos tax of .5% equal annual tax due of $7562.50

(1.0125+.5 x 500,000)

Your Mello Roos tax based on the above example would be $2,500 per year (subtract the two totals)

So why would you pay Mello Roos taxes?

Typically young professional families live in these areas. The newer parks, newer schools, newer ammenities (Ladera Ranch boasts two water parks, skate park, hiking trail, 5 community pools, tennis courts and much more) and overall newer area is attractive enough to pay these extra fees.

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