Calif HERO program for financing energy savings

[S T]

Anyone in Calif know about this? Hero Financing for certain energy efficient improvements, in this case "Energy Efficient Window Replacements"

Taxpayer is being told that the financing on this increases her property tax and it is fully deductible (program uses the property tax bill for billing purposes), as the t/p has an impound account through the Loan, the Lender will then pay the regular property tax, plus the additional on the loan through the monthly mortgage payment, as adjusted on the Property Tax Bill.

I don't believe there is an increase for the property tax deduction on Schedule A (property tax bill I would think the Prop Tax Stmt would indicate a separate line item and possibly Special Assessment), Reading some of the FAQ's on the program, relates only to the interest on the financing, however, that is not the taxpayer's understanding as being represented by the "energy efficient window sales person) and that the amount can be claimed as "property tax" deduction,

Thanks

Sandy

[S T]

Bringing this back up for year 2015 - I now have 2 clients - Have researched, and it appears that while the taxpayer is financing payment which is attached to the property tax bill - it contains the repayment of the loan for the Energy Improvements - so principal for the contract would not be a deduction, however, we can deduct the interest charged. Also, if the Energe Efficient Improvement were to qualify for a Tax Credit - that would be allowed according to the type of energy improvement qualifying.

Great financing tool and a collection as it is added to the property tax bill, however taxpayers are advised by the "Energy Sales people" that the entire amount is deductible as a property tax. I have one client, that is on a Mortgage Impound Account, so the Mortgage Co adjusted and reporting all as Property Tax Paid.

I do not believe this is a true statement or correct

Anyone in Calif or other States encountered this and how are you treating to report the deduction

Thanks

Sandy

[taxea]

The best place to get an answer would be the horses mouth....the CA property tax assessor's office and the HERO fund office. In Hawaii the law says the cost of installing and materials is fully exempted from property tax however, the Property tax office says they don't know how to do the exemption so they haven't done anything yet.
This property tax exemption is separate from any deductible tax credit.

[S T]

Further research, does show that the HERO does record a loan with a "first-lien status" with a 5, 10,15,20 year payback. Loan is repaid through the property tax bills. If the property is sold before the HERO financing is paid in full, it is questionable as to whether or not the remaining payments can be passed onto to the new buyer, or has to be paid in full before the new buyer can obtain financing.

From an article on the Hero Financing " Of course, there is always a catch with something this good. Because loans obtained through the HERO program are associated with the property tax bill, the loan is recorded against the property as a tax lien, giving the loan first priority over other loans tied to the property, including a mortgage. Lenders, of course, are not big fans of having their loans subrogated. That “first-in-line” position is so important that the Federal Housing Finance Agency recently released a statement unequivocally renouncing PACE programs, including the HERO program" Apparently Fannie Mae or Freddie Mac will not issue new Buyer Loans, with this HERO/PACE loan in place.

These loans appear to be ugly - and they are available in other States, not just California. One I am looking at is $22,580 - 15 years at 8.75% Annual amount added to property tax bill is $ 3,367

It would appear then the interest would be deductible as mortgage interest, as long as not over limit.

Given this, it should be reduction in the property tax paid through impound (will need to retrieve the property tax bills) and then calculate the interest on the loan and enter as "no 1098 received) deduct the annual interest calculated as other mortgage interest.

Thoughts

Sandy

[S T]

While I titled this thread Calif HERO Loan, it is just not Calif - could be available in any state

Any thoughts on my previous outline of what my research found

Treat as a Home Improvement Loan - Calculate the Interest on the loan year to year and deduct on Schedule A as Mortgage Interest , remove the Annual Payment from the Property Tax bill - as it is not a Property Tax, just a vehicle for collection of the the loan

and then the year Energy Efficient qualified property placed in service complete the Form for Energy Credits if they apply

I could really use another opinion as confirmation on this

Thanks

Sandy

[Roland Slugg]

Sandy, the HERO repayments do not increase the property tax. They are an added payment just like payments would be on a separate loan. When preparing the tax returns for someone in the HERO program, you have to see the property tax bill or other statement showing the breakdown between: (1) the property taxes themselves, and (2) the annual HERO payment. Only the interest portion of the HERO payments is deductible, and as home equity interest, subject to the $100k limit on a HEL.

... the taxpayer's understanding as being represented by the "energy efficient window sales person ...

Do you suppose the window salesman's tax advice is based on a deep and thorough understanding of the tax laws, or a desire to sell windows?

Before posting this reply I read several articles online about the HERO program as it operates in California. Almost all of the articles were very negative regarding the program's "virtues." FannieMae and FreddieMac won't buy loans that have a HERO component, and some buyers end up taking over a HERO loan's remaining balance without knowing about it ahead of time, creating lawsuits against sellers and R/E agents.

One other point: If someone sells his house, and there is an unpaid HERO loan balance that is taken over by the buyer, that balance represents an increase in the property's selling price. The cost of the improvements, of course, also adds to the property's basis.

[S T]

Roland, thanks so much for posting - Your information is confirmation of what I have researched

These loans are certainly not in the favor of the Homeowner and the Homeowner will be surprised when they try to sell the property or refinance, I am sure it was not explained to them.

Sandy