Property taxes paid to a US state or local government are usually deductible for federal income tax purposes, but not in every case.
The IRS said in an internal legal memorandum that it made public in March that fire prevention fees assessed against property owners in parts of California where the state is responsible for fighting fires are not deductible as property taxes. The fees are $150 per structure. They must be paid annually.
The IRS said the California legislature viewed the levies as “fees” rather than “property taxes” when it authorized them. Taxes require a two-thirds vote in the legislature. Fees require only a majority vote.
However, even if that were not the case, the IRS said the fees fail three other tests to be considered deductible property taxes.
A property tax is deductible only if it is imposed at a “like rate,” meaning it must be uniformly applied based on an independent variable, like property value or parcel or structure size. This one was a flat rate per structure.
To qualify as a property tax, the levy must apply to all property within the jurisdiction of the tax authority imposing it. The State Board of Equalization collected the fire prevention fee. It has jurisdiction over the entire state, but the fee was limited to a few areas where the state was responsible for fighting fires.
Finally, an amount cannot be deducted as a property tax if it is collected from specific properties in order to pay for a local benefit. An example would be an extra charge on houses in an area to pay for new sidewalks or water pipes.
The IRS said that personal property taxes — in contrast to real property taxes — can also be deducted, but only if they are a percentage of property value. It said there is no such restriction for taxes on real property. The memorandum is ILM 201310029.