In 2023, Texas state legislators approved a series of changes to the property tax code that promised significant savings for homeowners facing extremely high spikes in property tax bills. These changes included raising the homestead exemption to $100,000 (formerly $40,000), providing a cap for non-homestead properties as part of a three-year pilot program, and lowering the burden of school district taxes, which generally make up about half of each homeowner’s tax bill.
These new benefits go a long way to making property tax bills more affordable, but knowing how all the pieces fit together can help just as much. In particular, your property tax strategy should include understanding what homestead caps do and don’t cover, where they come into play, and what other options you have to make sure your property tax bill is as low as possible.
What Every Homeowner Needs to Know About Homestead Caps
A homestead cap is a benefit attached to the homestead exemption, so let’s zoom out briefly before zeroing in on how homestead caps work. Homeowners in Texas can file for certain exemptions on their homestead property.
These include the general residential homestead exemption, exemptions for over-65 and disabled homeowners (including disabled veterans), and agricultural “exemptions” that change the taxation structure for agricultural homesteads. Each one offers different savings opportunities.
The most commonly filed one is the general homestead exemption. Qualifying homeowners can file for this option and receive two main benefits:
- The exemption itself removes $100,000 from the property value amount for the purpose of calculating school district taxes. As many counties have a school district levy of around 1%, this can save you $1,000 on your property taxes every year.
- The homestead cap: This mechanism prevents your home’s taxable value from increasing more than 10% in any given year, regardless of the appraisal.
There are additional, smaller savings and opportunities that come from having a homestead exemption, but these are the main two effects.
How the Homestead Cap Works
Homestead caps affect your home’s taxable value, not your home’s appraised market value, so let’s zoom out one more time to get a clear view of what these two terms mean.
Every year, your central appraisal district (CAD) determines your property’s appraisal value. This value is based on the size, features, demand for properties in your neighborhood, and the typical ‘market rate’ for homes like yours in your area. This number can skyrocket in years with heavy real estate demand and slow down when fewer people are competing for homes.
Related: Maximizing Your Homestead Cap Value in Texas: What You Need to Know
Once the CAD finalizes their values, the whole list for the county is sent to your local tax assessor’s office. There, they calculate your home’s taxable (assessed) value. If you don’t have any exemptions, your home’s taxable value will be the same as the CAD’s appraisal value. But if you do have a homestead exemption, two things happen:
- Your school district tax portion will be calculated as if your house’s value is $100,000 less.
- Your taxable value can’t be more than 10% higher than the last year’s taxable value.
For example, suppose your home’s taxable value was $250,000 last year, but the appraisal value is $300,000 this year. If you don’t have a homestead exemption and cap, your taxable value increases to $300,000. But if you do have a homestead cap shielding your property, then your taxable value can’t become greater than $275,000. The only exception is if you made renovations or improvements to the property.
The Benefits of the Homestead Cap
There are very clear financial benefits for homeowners with a homestead cap:
- Savings: The taxable value of your home with a homestead cap in place will almost always save you money. The effect is compounding, so you save even more money as time goes on. On top of the savings we explore below, a homestead exemption also lowers your taxable value by $100,000 for the purpose of calculating school district taxes. For example, compare these two homes that each start at $300,000 in Year 0 in a market growing 15% each year, but only one has an exemption:
- Year 1: $330,000 (with exemption) vs. $345,000 (without exemption)—a $15,000 difference in taxable value, even before considering the $100,000 exemption amount
- Year 2: $363,000 (with exemption) vs. $396,750 (without exemption)—a $33,750 difference in taxable value, even before considering the $100,000 exemption amount
- Year 3: $399,300 (with exemption) vs. $456,262.50 (without exemption)—a $56,962.50 difference in taxable value, even before considering the $100,000 exemption amount
- Predictability: On top of the savings, a homestead cap makes your taxes more predictable. As long as your exemption is in place, your taxes won’t increase by more than 10%, except for any remodeling or improvements you make on the property.
What the Homestead Cap Doesn’t Protect
However, it’s important to remember that the homestead exemption only takes effect on the taxable value. It won’t change your home’s appraisal value. This means you might suddenly face a sharp spike in your property’s taxable value if you lose your homestead exemption. For example, if you move and keep your first home as a rental property, it will lose its homestead status and no longer be eligible for the homestead exemption.
A homestead cap also won’t stop your property’s taxable value from continuing to increase in years with a flat market. If there’s a big gap between your home’s appraisal value and taxable value, your taxable value will continue to increase every year until it’s level with your appraisal value.
For example, if you have an appraisal value of $456,262 and a taxable value of $399,300 and your appraisal value holds steady, your taxable value will still go up each year until it eventually reaches $439,230.
This isn’t to say a homestead cap is bad—you’ll never pay more than you would have without a cap. But it means it only gives you partial protection, and relying only on your homestead cap is an incomplete strategy. Instead, make sure you’re doing everything you can to control both the appraisal value and taxable value. The only way to control your appraisal value is to protest your property taxes every year.
How to Limit Property Tax Increases
The best approach for making sure you’re paying a fair amount in property taxes every year on your primary residence is to take a multi-layered approach. Follow these steps.
Step 1. Apply for Your Exemption
You can file for a homestead exemption (and any other exemptions you may be qualified for) through your local government. Once you have an exemption in place, you don’t have to file again each year.
Step 2. Protest Your Property Taxes Every Year
This process is called ‘protesting property taxes,’ but you’re actually protesting the appraisal value of your property. Each spring, your home’s value is updated in local records, and you can protest the valuation. By providing information, such as what you think the value should be and information to support your claim, you can argue down the value. The appraisal review board may lower the amount to your number, decide on a middle ground, or keep it at the initial value. The final number is then sent to the tax assessor.
Related: Tax Protest Strategies: How to Lower Your Property Taxes Effectively
Protesting every year gives you the best possible chance at keeping the appraisal value low and keeping it relatively close to the taxable value. This ensures your finances are more protected whether you sell the home, lose your exemption, or are in the middle of a turbulent market.
Step 3. Review Your Property Tax Records to Ensure Your Appraisal Value and Taxable Value Are in the Right Place
Make sure you review your records too. Knowing your home’s appraisal value, taxable value, and general neighborhood trends can help you stay ready for changes in your property tax bill.
Protect Yourself From Property Tax Hikes by Protesting Annually
Protesting your property taxes should be an annual to-do so you never miss a chance to keep your taxes in check. But the process can be overwhelming—and the deadlines are strict. At Home Tax Shield, we help homeowners by managing the protest process on your behalf. We can file your protest notice, assess your property’s value, and represent you in hearings with the appraisal district to make sure you get any appraisal reductions your property deserves. Sign up today so you know your property protest is in good hands this spring and every tax season thereafter.