When you pay your property tax bill each year, those funds go toward your city, county, and local school budgets, covering anything from firefighters’ salaries to ongoing road maintenance. The exact tax bill you receive is based on three key numbers:
- first, the total spending budget of the taxing units that your property is subject to taxes from
- second, the assessed value of your home
- and third, the effective tax rate (which is based on historic trends, the budgets that the tax office needs to meet, and the exemptions you qualify for.
Because Texas relies on property taxes, rather than state income taxes, to cover local government budgets, Texas has very high property taxes—in fact, it takes 7th place in the list of highest property taxes.
As a counterbalance against high property taxes, the Texas Comptroller’s office has established a series of exemptions. Homeowners may qualify for various exemptions to reduce the total taxable portion of the property for specific levies, stabilize potential increases in appraisal values, and other protections that provide tax relief. Here, we’ll focus on the homestead exemption: its possible discounts, its options for individuals in specific demographics, and one of its most essential features, the homestead cap.
What’s Going on With Property Taxes?
As a general rule, property taxes increase. Homeowners may see their bills go up for various reasons: bigger city budgets, more improvements and maintenance projects in their counties, and increases in their property’s value over time. That last factor has been the key concern for many homeowners across the state facing steep rises in house values and, through that, property taxes. Travis County, for example, saw a particularly steep increase in the median house price, with a Texas Monthly editor noting from his own experience that, “According to the Notice of Appraised Value we received in April, that figure has soared to $656,039—a staggering 53 percent increase and exactly in line with the county-wide rise in values.”
Some of the key underlying factors driving up house valuations for tax purposes include:
- Rising house prices: While the market cooled slightly during 2022, Texas saw a red-hot housing market across virtually the entire state. High demand led to high prices and even bidding wars that escalated the final purchase price to new heights. When the county registers a house sale in the area, new home prices weigh into the estimated value of all the properties in the neighborhood, even those that were never on the market.
- Rising labor and material costs: Many counties will calculate property assessments based on anticipated market price. Others will assess value based on the cost of replacing or rebuilding the property’s structures. But supply chain turbulence and labor shortages mean the cost of replacing properties is inordinately high.
Your area’s effective tax rate may also increase, leading to a higher total tax bill. Cities and counties also struggle with higher prices and labor shortages, meaning their budgets have to go up. While local governments can’t increase the amount of revenue collected through taxes by more than 3.5% without putting the issue to a vote, the tax rate can still creep up—and minor differences have a considerable effect on your bottom line. If you have a $250,000 home, the difference between a 1.9% property tax rate and a 2.25% property tax rate is $875.
Related: Is the Tax Assessment the Value of the Property? What’s the Difference?
The Value of Consistency in Your Property Taxes
However, it’s not the high prices themselves that pose the most significant risk to many homeowners. Drastic increases can make your budget very tight, but having an escrow account means those increases are spread across twelve monthly payments. Instead, the most significant risk is unpredictability. Here’s why:
- Escrow accounts try to forecast, but they aren’t always exact. If you have an escrow account, your lender tries to predict taxes for the year ahead as accurately as possible so they can collect monthly portions of the property taxes due by January 31 each year. This helps ensure you have the funds available. But when the market swings wildly, that predicted amount might not be enough to cover what the county issues, leaving you to pay an utterly unexpected bill.
- When house prices go up, they don’t often come back down: We may be seeing a slump (or at least a slight slowdown) in real estate demand, which can make market prices plummet quickly. But that cooling effect doesn’t extend as easily to property taxes. All of the high-dollar purchases in your area stay part of the appraisal district’s calculations for a long time, meaning your property values may not align with your expectations.
As a result, homeowners need to pursue tax relief measures that guarantee consistent, predictable tax bills. The homestead exemption can help you do precisely that.
How the Exemptions Reduce Your Property Tax Bill
A homestead exemption can help you with the key concerns that impact your property tax bill: the value of your property and your effective tax rate. An exemption is a measure established by the state to protect part of your property’s value from being included in tax calculations. Depending on your eligibility for different exemptions, you can see significant decreases in your school district taxes or even your total property taxes. With a general homestead exemption, you receive a $40,000 exemption for school district taxes and additional potential exemptions for flood control, some road maintenance, and more.
A Quick Overview
A successful filing of a homestead exemption results in these opportunities for savings:
- A $40,000 exemption of your home’s taxable value regarding the school district tax levy. Your total property taxes are comprised of multiple levies, such as school district taxes, city taxes, county taxes, and junior college taxes. Since school district taxes tend to have a rate of between 0.9% and 1.2%, you can expect savings of between $360 and $480.
- An additional $3,000 exemption for flood control and farm-to-market roads (if applicable for your location).
- For disabled and senior homeowners, a homestead exemption can include an additional $10,000 exemption for school district taxes, leading to savings of between $90 and $120 on top of the earlier bill reduction.
- An optional exemption if a taxing authority opts in: The different tax authorities establishing the various levies making up your total tax bill can opt-in to allow an exemption of no more than 20% of your property’s value and no less than $5,000. This benefit will vary from location to location.
This measure offers one more major benefit: a homestead cap. This is different from an exemption. Instead of excluding a set portion of your property’s assessed value from tax calculations, it prevents your tax district from raising the estimated value of your property by more than 10% per year (excepting any improvements you’ve made that would boost the value of the property).
What the Homestead Cap Does: Year 1, Year 2, Year 3
Let’s examine the significant savings of a homestead cap over time. Imagine that your home and a neighboring property are seemingly identical: the same square footage and property features, tax levies, and market interest raising house values by 19.8% (the typical increase in value for a mid-priced Texas property across the past year). They have a homestead exemption, and you don’t. Here’s what that would look like over time if you both start with a $325,000 home value:
- Year One: Your home’s tax appraisal value would rise to $389,250 because of that estimated 19.8% increase. Your neighbor with the homestead exemption will receive a 10% increase, capping their assessed value at $357,500.
- Year Two: At that same market boost of 19.8%, your house’s value will increase to $466,321.50. But your neighbor, protected by the homestead cap, is safely below $400,000 at $393,250.
- Year Three: With identical percentages, the taxing county now measures your property as worth $558,653.16 and your neighbor’s as worth $432,575.
That 19.8% rate is based on today’s high-priced markets, so actual results over time will be different. But even with this simplified forecast, you’ll be paying approximately $10,055.76 at a 1.8% tax rate, while your neighbor pays $7,786.35.
Related: Texas Property Tax Exemptions that Benefit Residential Homebuyers
Quick Checklist of Requirements
To receive a homestead exemption, you need to fulfill all the criteria listed below:
- Your Texas property needs to be your primary residence, and you need to be the owner. Spouses who jointly own the property are eligible; individuals who own a property are partially eligible. But if you own a property you use as a rental investment, that property does not qualify. The property can be a home on the leased or owned property of no more than 20 acres, a manufactured home, or a condo.
- You need to fill out the application for a homestead exemption. Once you fill out this form and provide supporting documentation, your property will receive the exemption. Your county’s appraisal district website will also have the form and allow you to confirm whether or not your property currently has an exemption.
- You need to file for the exemption by April 30 of a given year for the benefits to apply to the current tax year.
- Additional exemptions and criteria: Disabled property owners and property owners over 65 years of age are eligible for extra savings. Your county may automatically apply the increased exemptions based on age, but it’s always best to double-check your status with your tax authority.
What Else Can You Do to Keep Your Property Tax Bill as Low as Possible?
While a homestead exemption is a highly effective tool for lowering and stabilizing your property tax bill to make the expenses more manageable, it’s not the only tool available. Homeowners have the right to protest their property taxes (whether or not they’re eligible for a homestead exemption). If you believe you’re not receiving all the exemptions, you’re entitled to or that your property’s value was inaccurately assessed, you can file a formal protest to present your case. The team at Home Tax Shield is here to help. We can manage the process for you, objectively assess your home’s value, and ensure your right to fair property taxes is upheld. Sign up today to learn more and prepare for the 2023 property tax season.