Source: FTB Tax News, July 2016. and IRS Topic 503 – Deductible Taxes (May 25, 2016)

The California PACE program allows qualifying taxpayers to install energy-saving home improvements and repay those outlays at the time (and with) their property tax payments to the county.

Both the FTB and IRS have made it clear, “Therefore, under the above federal guidance, … neither the principal nor interest amounts paid on a taxpayer’s property tax bill for energy saving projects are deductible real estate taxes.  However, taxpayers may be able to deduct some or all of the interest as a home mortgage interest deduction..”

In our opinion, the existence of these new programs may renew the efforts by the FTB to require the attachment of property tax bills to returns in the future.  (This was proposed a few years ago, but was withdrawn due to administrative costs of the program).  Regardless, this will be a new audit area… especially triggered where property taxes jump from year-to-year.