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Ed Johnson
Ed Johnson, Tax Preparer
Category: Tax
Satisfied Customers: 10760
Experience:  GPHR Cert; U.S. Treasury Tax Advocacy Panel appointee
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Can interest incurred by a special assessment be deducted?

Unfortunately, the interest on this tax is not deductible.

 

It is not ad volarum tax so the interest is not also.

 

Special assessments generally are not deductible. For individual income tax purposes, property owners who claim itemized deductions may deduct state and local property taxes in determining federal and state taxable income. However, property taxes that provide specific benefits that tend to increase the value of the property may not be deducted.

Federal individual income tax instructions specify that property taxes may be deducted if the tax is based on the assessed value of the real property and the tax is assessed at a uniform rate on all property in the jurisdiction. The instructions further specify that to be deductible "the tax must be for the welfare of the general public and not be a payment for a special privilege granted or service rendered to you" [the taxpayer].

Property taxes may not be deducted if the taxes are charges for services or assessments for local benefit. Which these special assessments are determined to be.

Now your question is on the interest itself. but in order for the interest to be deductible it must be on a loan that is secured by the property.

since a special assessment is not a loan, though it may be debt or obligation, the interest is not deductible.

In actuality there is nothing in regulation that addresses this category of interest per se. this leaves the door open to obtain a letter ruling from the IRS.

I understand your potential contention. The special assessment is for improvements that will increase property value. So then the interest you are thinking must be tax deductible. However, this interest does not meet the basic requirement in that it is not attached to a loan.

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Resolved Question:

Can I deduct the interest incurred by a special assessment bill that I receive from my city. My city paved my alley and is assessing me $800 annually plus interest of $438. The length of this assessment is 10 years. Can I deduct the $438?
Submitted: 8 years ago.
Category: Tax
Expert:  Ed Johnson replied 8 years ago.

Unfortunately, the interest on this tax is not deductible.

It is not ad volarum tax so the interest is not also.

Special assessments generally are not deductible. For individual income tax purposes, property owners who claim itemized deductions may deduct state and local property taxes in determining federal and state taxable income. However, property taxes that provide specific benefits that tend to increase the value of the property may not be deducted.

Federal individual income tax instructions specify that property taxes may be deducted if the tax is based on the assessed value of the real property and the tax is assessed at a uniform rate on all property in the jurisdiction. The instructions further specify that to be deductible "the tax must be for the welfare of the general public and not be a payment for a special privilege granted or service rendered to you" [the taxpayer].

Property taxes may not be deducted if the taxes are charges for services or assessments for local benefit. Which these special assessments are determined to be.

Now your question is on the interest itself. but in order for the interest to be deductible it must be on a loan that is secured by the property.

since a special assessment is not a loan, though it may be debt or obligation, the interest is not deductible.

In actuality there is nothing in regulation that addresses this category of interest per se. this leaves the door open to obtain a letter ruling from the IRS.

I understand your potential contention. The special assessment is for improvements that will increase property value. So then the interest you are thinking must be tax deductible. However, this interest does not meet the basic requirement in that it is not attached to a loan.

Ed Johnson and other Tax Specialists are ready to help you