When property owners file their tax returns with the Franchise Tax Board in April 2013, they’re in for a rude awakening.  That’s because they’ll be required to break down payments into deductible and non-deductible portions, likely reducing their itemized deductions by thousands of dollars.

But don’t go calling your representatives about which new legislation implemented this change; it has nothing to do with new taxes or laws, but rather a technology upgrade expected to be completed in 2012 at the FTB’s headquarters in Sacramento.  Until that system is up and running, the tax authority hasn’t been able to differentiate between deductible and non-deductible portions of property tax payments.  Property owners typically deduct the total amount of their property tax bill – or the 1098 amount provided by their mortgage company – leaving the state short on taxable revenue well into the billions.  For example, Mello-Roos fees in Orange County alone account for more than $200 million of non-deductible amounts expected to be written off for tax year 2011.  The updated systems will allow the deductible and non-deductible split, giving Sacramento $200 million of “found” income to collect revenue on once the computers are operational.

After a thorough review of state records turned up the shortcoming in property tax deductions, the FTB chose to hold off implementation of the new rules until early 2012, allowing taxpayers ample time to adjust annual withholdings – and to ensure tax preparers have access to the proper documentation when it’s time to filing for tax year 2012.