Reconsidering Mello-Roos after the New Tax Law
The newly-passed tax law and its limitation of $10K deduction for state and local taxes (income and property) means that most, if not all, people who are paying Mello-Roos fees have lost the ability to deduct them on their federal income taxes. What I’m trying to determine is if it’s a financially sound move to pay them off, and while I expected it to be an easy answer, there are several complications. The first revolves around any discount you might receive when you pay them off.
I have one friend who, before he moved, paid off his Mello-Roos. He claimed that he paid off a $1,550/year payment that had 20 years left on it for $20,000. While these are round numbers, they would indicate that the bond carries an interest rate of approximately 5%. When the Mello-Roos was deductible, this would have effectively been reduced to about 3%. Whether you pay it off depends on if you think you can earn more than 5% somewhere else. If you think you can make 7-9% on investment property out of state (our investors do), then you probably don’t pay it off. If you would otherwise put it in a CD making less than 1%, then it might make sense to eliminate the payment.
On the other hand, I have a very smart friend who sells bonds for a living, including the Mello-Roos bonds. He claims that if you pay off your bond, you don’t get a discount, but have to pay the full amount. So, using his explanation, my first friend would have had to pay $1,550 times 20, which would have been no discount and not made much sense at all. According to my bond-trading friend, you can only pay off the Mello-Roos at a discount when the house is first sold. He also brings up a very good point: we shouldn’t assume that the tax law will remain the same going forward. It is possible that the next administration may flip back and make all state taxes deductible.
What is the right answer? I’ve got two smart people who have given conflicting information. So, what I am doing is filing a request for my personal Mello-Roos payoff. I should have that information by the next issue, and I will conclude this article with what I learn as well as information on how you can pay off your Mello-Roos if you decide to.
Scott Voak, the top selling agent since 2008 (data from SANDICOR MLS as of 12/31/2015). Email him to subscribe to his weekly real estate newsletter – Monday Morning Coffee.
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