The Texas housing market is settling into its new normal, and that will impact your finances whether you sell your home or not. As of November 2023, Texas’s median home listing price has increased 1.8% month over month, and officials use that market data when calculating home appraisal values.
Due to dozens of market factors, such as people moving to the state in large numbers and a shortage of homes on the market, many Texans are seeing their home values rapidly increase regardless of making improvements or putting their homes on the market. When this happens, mechanisms like the homestead cap value can stabilize your property value growth and your property tax bill.
Your homestead cap value plays an important role in cutting off steep increases in homeowners’ property taxes. Understanding how it works is a crucial element in leveraging it correctly. Combining the benefits of your homestead exemption with other tax relief strategies can reduce your property tax bill even further, both now and in the future.
What Is a Homestead Cap Value?
Qualifying homeowners with a primary residence in Texas can apply for a homestead exemption on that property. A homestead exemption helps curtail property tax bill amounts and creates stability as market forces increase the appraisal value of homes in different parts of the state. There are two key advantages of filing for a homestead exemption:
- You receive a $100,000 exemption on your school district taxes. Property taxes aren’t a single levy. Instead, they’re made up of school district taxes (typically half of the total tax rate, or at least 1% in many cities), city taxes, county taxes, and junior college taxes. By exempting $100,000 of your property’s value from that ~1% line item, homestead owners receive a $1,000 reduction in their total property tax bill. In previous years, this exemption amount was $40,000, but it increased in 2023.
- You receive a homestead cap on your home’s taxable value. Under Section 23.23 of the Texas property tax code, the taxable value of your home can only increase by 10% each year (excepting any improvements you’ve made to the property). This mechanism helps protect property owners from sudden surges in the market and artificially stabilizes property value for tax collection purposes. However, this doesn’t negatively affect your home market value. You can have your home’s market value increase by 25% in a given year and have it taxed at a 10% increase.
Filing for a homestead exemption is free, and homeowners can file online or at their county office. Once the exemption is in place, it remains valid until a change in status or a title change (such as selling your home or moving it into a trust), so you don’t have to file year after year.
How a Homestead Cap Works: The Details
When county appraisers and tax assessors are updating your property’s profile to calculate your annual property tax bill, there are two main numbers to consider:
- Your home’s market value: Also sometimes called the appraised value, this number is the starting point for calculating your property taxes. Every year, your appraisal district office will update your property record with a new appraisal value. In most years, this value will increase. It can increase based on market forces and any recorded improvements you’ve made to your property. County officials must appraise your home’s value at least once every three years, and they can use software applications and comparable property data in the intervening years.
- Your home’s taxable, assessed value: This is the number that county tax assessors use when calculating your final property tax bill. This is where your homestead exemption takes effect, and it can become complex. For the purposes of the homestead cap value, your home’s taxable value cannot increase beyond 10% of the previous year’s taxable or assessed value (minus improvements). Your home’s taxable value is also reduced by $100,000 for the purpose of calculating school district taxes.
*An important note on terminology: You’ll see all four terms (market value, appraised value, taxable value, and assessed value) used throughout different stages of filing exemptions, protesting your taxes, and reading your property tax bills. The most important distinction is between your market value, which the appraisal district calculates, and your home’s taxable value, which county tax assessors calculate.
The key takeaways regarding how your property taxes and homestead cap value works are:
- Your appraisal value is controlled by the market.
- Your taxable or assessed property value is based on the appraisal value but controlled by the homestead cap, so it won’t see a sharp increase just because the market does.
- Your market and appraisal values may be higher than your taxable home value each year.
For an example of these distinctions at work, consider this example property record in Harris County, which distinguishes between market values and taxable values (and has different taxable values for different levies).
Benefits of Having a Homestead Cap
Having a homestead exemption in place on your property offers several financial benefits. The main benefit of a homestead cap is that your property taxes are less likely to experience an expensive spike. Your home’s taxable value cannot increase by more than 10% and the added value of any improvements. Also, in 2019, Governor Abbot signed a bill that ensured local governments cannot increase property tax revenue beyond a 3.5% increase each year.
Related: Lowering Property Taxes For Texas Homeowners: Home Tax Shield 2023 Results
Because both the taxable amount (your home’s value) and the tax rate (as decided by increases in local government budgets) have strict caps in place, your property tax bill can only increase by so much every year.
- If you own your property outright: When you don’t have an escrow account managing your property tax payment, you owe a lump sum every January 31st. Having to pay $3,797, the typical property tax payment in Texas, in one amount can already strain your budget, but a sudden increase of $600 or $1,000 might make payment impossible. The homestead cap value prevents sudden shocks that may be outside your budget.
- If you have an escrow account: Your mortgage holder estimates your property taxes every year and adds a fraction of the amount to every monthly mortgage bill so the full amount is ready by the January 31st deadline. When your property tax bill isn’t controlled by a homestead cap, it’s unpredictable; they may collect too much or too little. This will result in sudden changes in your mortgage payment as they try to correct their estimate. But with a homestead cap in place, their estimates are more accurate, and your monthly bills are more consistent.
Drawbacks of Using Your Homestead Cap as Your Only Property Tax Strategy
The homestead cap value itself doesn’t have downsides. However, it offers less protection than many homeowners believe.
The primary drawback of exclusively relying on a homestead exemption to lower your property taxes is that it doesn’t affect your home’s market value or appraisal value. As county appraisers evaluate your property each year, that value will grow and grow unchecked. It can even grow out of sight if you only review your home’s taxable value and property tax bill each year.
If your home loses its homestead exemption status, your appraisal value will become your taxable value. This happens if you sell the property, it changes ownership status as the result of an inheritance, or you rent out the property, and it’s no longer your primary residence.
However, there’s an invisible drawback that can affect millions of homeowners any time there’s a market slowdown or local properties appraise at less than 10%. If the gap between your market value and taxable value is too big, then your taxable value will still increase by 10% during slow market years.
Illustration of Taxable and Market Values
Consider this example property in Collin County. In 2015, the market value of the property was $184,033 and the taxable value was $149,992. But in 2016, the market value didn’t just stagnate—it decreased to $179,239. Despite the slowdown in market forces, that taxable value of the property still increased by just under $15,000 to $164,991. This event wasn’t restricted to just this one property; homes throughout the neighborhood faced the same trend.
As home price increases start to slow down across large portions of the state, homeowners can find themselves in the same situation: their market value has finally calmed down, but their taxable value will continue to go up by 10% each year.
If the gap between the appraised value and taxable value is $50,000 or even $100,000, which is the case for many long-term homeowners, property owners could see years of market stagnation without it slowing down their property tax increases.
For example, that same Collin County property saw another value slowdown in 2020 and 2021. But it wasn’t until 2021 that the appraisal value grew slowly enough for the taxable value to ‘catch up’ and for the owner to finally see real savings. That year, the market value of the home grew by just $318, and the taxable value increased by $15,565, or 6.4%.
Protest Your Home’s Appraisal Value to Maximize Your Homestead Cap Value
To protect yourself from too-high property tax bills, don’t rely solely on the homestead exemption and homestead cap value. Instead, keep your home’s appraisal value in check and make sure it stays as close to the taxable value as possible.
Related: Texas Property Tax Laws Are Changing: Do You Still Need to Protest Your Taxes?
In Texas, homeowners have the right to protest their property taxes. More specifically, they have the right to protest the appraisal value that county appraisers calculate in the spring of every year. When you see your property’s new appraisal value online or receive a notice in the mail, you can file a protest notice that provides a countervaluation and your argument about why the county’s number is wrong.
Some of the reasons could be:
- The increase is based on recently sold homes in your neighborhood that have been flipped or fully renovated. These properties’ values don’t reflect the value of typical lived-in homes.
- The valuation may not have considered easements or other factors that reduce your specific home’s market value.
County appraisers can and often do make mistakes—they don’t know your home as well as you do. By protesting and providing more detail about your property, you can fight to have the appraisal value lowered to a fair amount.
Maximize Your Homestead Cap Value by Using All Available Property Tax Relief Strategies Every Year
Every homeowner can benefit from two strategies for lowering property tax bills every year: having a homestead exemption and protesting their property taxes. When combined, these two strategies help ensure both the appraised value and assessed value are as fair as possible.
At Home Tax Shield, we help homeowners protest their property taxes every year. We can file your protest notice, present evidence on your behalf, and represent you in negotiations or a formal hearing in front of the Appraisal Review Board. Sign up today for long-term property tax control.