Let’s say you buy some land out in a rural area of California and build a house and a couple of barns on it. A few years later the California State Board of Equalization — the state agency that collects state sales, fuel, alcohol, and tobacco taxes and various fees — comes along and charges you a $450 fire protection fee, $150 for each structure you own.
Homeowners may deduct real property taxes as an itemized deduction on Schedule A, while property taxes paid on commercial or rental property is deductible as a business operating expense. Since the fee was imposed on owners of structures, you might think it was deductible as a real property tax.
You’d be wrong.
Back in 2011, California enacted legislation to charge a $150 fire prevention fee on each structure located within areas where the state had the primarily responsibility for providing fire protection services. Those who owned vacant land in such areas were not required to pay the fee. The Legislature stated that the presence of structures within these areas posed an increased risk of fire and therefore their owners should pay the extra fee.
One affected property owner asked the IRS if the fee was deductible as a real property tax. The IRS’s Office of General Counsel said no.
The general rule is that for a property tax to be deductible it must be levied for the general public welfare, based on the assessed value of the real property, and charged uniformly against all property under the jurisdiction of the taxing authority. (IRS Reg. Sec. 1.164-4(a).)
The IRS said that the fee didn’t qualify as a deductible real property tax because it was:
- imposed only against specific property to provide a local benefit
- imposed only against property in areas where the state provided fire protection services, not on all property within the state’s jurisdiction, and
- it was not based property value or structure size — instead, the $150 fee was imposed against each structure no matter how large or small. (CCA 201310029.)
To help make up for budget shortfalls, state and local governments across the country have been imposing special fees on real property owners for services such as fire protection. This opinion by the IRS’s Office of Chief Counsel shows that, to be deductible, such fees and the benefits obtained from them cannot be narrowly focused on a subset of property owners in the taxing authority’s area.
Rather, the fee must be imposed on all property owners, benefit them all, and be based on the value of their property. Thus, for example, a fire protection fee imposed on all property owners in California based on their property’s assessed value, and used to fund fire protection services throughout the state, would be deductible.
Stephen Fishman is a tax expert, attorney and author who has published 18 books, including "Working for Yourself: Law & Taxes for Contractors, Freelancers and Consultants," "Deduct It," "Working as an Independent Contractor," and "Working with Independent Contractors." He welcomes your questions for this weekly column.
