Texas property tax law changes every few years. See the latest posts for the most up-to-date information.
Your home is a significant investment. Whether you’ve found your forever home (or at least a home where you picture yourself living for at least seven years) or you know you’ll be putting your home on the market soon, it represents a prominent asset in your total portfolio. For most Americans, a home is the most significant asset they’ll ever buy.
But when it comes to calculating the asset’s value, there are lots of conflicting numbers and methods. This guide will look at the two most commonly used ones: a property tax assessment and a home’s market value. Once you know the difference, you can strategically arrange your finances, contest property taxes as needed, and have a better idea of the future selling price of your home.
What Is a Property Tax Assessment?
Property tax assessment is the official process the county goes through to assess a property’s value, calculate the total tax rate of homes in the area, city, or county, and determine the final property tax bill the property owner will need to pay.
During this process, a property assessor hired by the county will assess the value of your property, including structures and the land itself. This value calculates property taxes in bankruptcies and legal processes involving creditors or seizures and gives you a general estimate of your home’s growing value over time.
How Is Your Property Assessment Value Calculated?
County assessors choose between three popular methods for assessing the values of properties for tax purposes. Those methods are:
- Cost Method: An assessor can determine the value of your property by calculating the amount of money it would take to replace the property. This means the value of new properties reflects the cost of materials and current labor and building trends. The value of older homes will reflect depreciation.
- Income Method: This assessment involves looking at how much income the property would warrant if the property has been rented out. This method reflects current rental trends and pricing, the cost of maintaining and managing the property, administrative tasks, etc.
- Sales Evaluation Method: This method may be the first one that comes to mind when you imagine how the county assesses your property value, and it’s the closest to your market value. Through this method, the county assessor looks at the sales prices of comparable homes in your area to gauge your probable value. Depending on the level of personal attention your property receives, the assessor may also change the estimate to reflect specific features and updates of your property.
Regardless of the method used, an assessor’s job is to use available information about your property and information about comparable properties to determine a fair value. However, there are some limitations when assessors work at a large scale, as they can’t determine the individual property’s value. They may use estimates, percentages based on general trends, and analytics software to streamline their processes.
This process occurs every one to five years, depending on your country’s size and operations.
How Your Property Tax is Calculated
The above steps result in your property value assessment, the price the county thinks your house is worth. However, that’s not the end of their calculations.
The county also determines the total tax rate that residents of the county will need to pay. This percentage tax is made up of the millage taxes or mill levies of the different jurisdictions within the county, such as the city, school district, and county. If these jurisdictions have mill levies of 2%, 1%, and 2%, respectively, the total tax rate would be 5%.
Presuming you have a property assessed at a value of $250,000 and no exemptions, your property tax would be $12,500.
Related: A Quick Guide to Homeowner Taxes in Texas
What Can You Do to Affect Your Property Tax Assessment?
You can use a couple of strategies to lower your assessed property value or your final property tax rate.
1. File for Exemptions
Filing for measures like a homestead exemption, if the property in question is your primary residence, or senior and disability exemptions can lower your tax obligation. To take advantage of these exemptions, you would simply file a form with the county regarding your primary residence, age, and applicable disability documentation. The exemption would ‘exempt’ a portion of your property’s assessed value from the property tax calculation.
For example, the homestead exemption rose from $25,000 to $40,000 in 2022. With a properly filed homestead exemption, your tax obligation lowers to $10,500, or (($250,000-$40,000)*0.05).
Every state and county has slightly different processes. In some states, you are automatically granted a homestead exemption, while others require you to file the exemption actively to receive the benefit.
Exemptions can also do more than reducing the value portion of the total tax calculation. In states like Texas, it protects your property value from rising more than 10% yearly, so you aren’t swept up in inflation or a highly competitive housing market.
2. Contest Your Property Taxes
Filing for an exemption as in the previous step doesn’t alter your current property assessment; it simply reduces your obligation, and caps value increases over time. This strategy directly addresses your property taxes. Every Texas county allows residents to protest their property taxes.
This is a multi-step process in which you can provide a counter-assessment of your property’s value, discuss your property with a staff appraiser, or, as a final measure, schedule a hearing in front of a panel to protest your property’s assessed value. The ideal outcome of this process is that the authorities would lower your home’s assessed value, lowering your property tax bill.
Individual homeowners can handle this process, though it is time-intensive and can be tedious or stressful. Alternatively, homeowners can hire a service to manage the entire process on their behalf.
Related: What Is a Property Tax Appraisal, and What Does It Mean?
What Is a House’s Market Value?
Earlier, we discussed how a property assessment from the county helps calculate taxes and can even give property owners an estimate of the property’s worth. However, estimations don’t truly calculate the value of a property for personal finance purposes, and they aren’t designed to. Instead, homeowners should turn to the house’s market value to better understand their property’s worth.
Ultimately, a market value is how much someone is willing to pay for the property. That explanation can be unhelpful, but that’s the most accurate way to declare a definite market value of a property. If someone is willing to pay that amount (and no higher), that’s the property’s market value.
This value is important if you’re considering putting your house on the market or your lender needs an accurate estimate of the house’s market value for a refinancing agreement or HELOC. Professionals can use various mechanisms to estimate your house’s market value without a sale.
Home sellers and their real estate agents can use a combination of real estate comps and an appraisal to determine their estimate of the market value:
- Real estate comps are reports on comparable homes in your area that have sold recently. If you’re selling your home, your real estate agent may “pull comps” of homes in your neighborhood or adjacent neighborhoods that (i) have sold within the last ninety days, (ii) are approximately the same age as your home, and (iii) have the exact bedroom count, bathroom count, and other earmark features. These numbers give you a general understanding of the actual market value of similar properties.
- Appraisals: A professional appraiser can evaluate your home and determine the fair market value based on their calculations. Lenders use estimates to ensure the property is worth at least the loan amount to protect their interests. Counties may also use formal appraisals to gain more insight into a property’s value.
While these two factors can give homeowners a lot of insight into what their home’s market value is likely to be, they don’t guarantee any specific price. For instance, selling a home in a hot market will often result in you receiving a higher offer than the fair market value estimations predicted.
However, if you’re selling your home after a hot market has started cooling, those real estate comps are inflated, and your property may have a lower market value than it would have in the previous six months.
Assessment vs. Appraisal
Both ‘assessments’ and ‘appraisals’ calculate the value of a home. They can seem interchangeable, but they have very different implications in the industry. A county property assessor may use estimates and analytics to calculate the assessed value of multiple properties at once.
On the other hand, an appraiser will focus specifically on your home by considering comps, the condition of your home, modifications and needed repairs, and more. Factors like your proximity to power lines and cemeteries can affect your home’s appraised value.
Ultimately, think ‘appraisal’ for selling your home or getting a specific evaluation on your home, and think ‘assessment’ for property taxes.
What to Do If You Think Your Property Tax Assessment Value Is Too High
Your home’s market value matters when you’re in the middle of selling your home. But for many more routine considerations, like paying your property taxes, your property tax assessment matters more.
Suppose you think your property tax assessment value is higher than your property warrants. In that case, it’s essential to contest it early and often to reduce your tax obligations and have a fair assessment of your property. At Home Tax Shie