Texas property tax law changes every few years. See the latest posts for the most up-to-date information.
High prices in every sector of the economy jeopardize people’s finances; the cost of groceries, energy, and day-to-day goods are climbing for people across the country, and Texas residents are no exception. There’s no clearer example of painfully high prices than in the real estate market: prospective homebuyers are struggling to save for a down payment, even as the market backs down from the peak of the house-buying frenzy. Simultaneously, both new and established homeowners are feeling the pinch from their property tax bills, which started coming out in October.
Local and county governments are trying to navigate a middle ground between not being able to afford the increased costs of supplies or labor for local projects and trying to minimize revenue demands on its citizens. Some are implementing no-new-revenue tax rates, while others are helping residents pursue tax relief through exemptions. In this article, we’ll look at how new residential homebuyers can use tax exemptions to lower their tax bills and protect their finances. Keep reading to learn:
- How property taxes in Texas work
- What you may be expected to pay as soon as you buy a new home
- What tax exemptions are and how they work
- What else you can do to reduce your property tax bill
How Do Texas Property Taxes Work?
Texas does not have a state income tax that funds state-wide programs and initiatives. Instead, local and county governments receive their funding largely from property taxes within their boundaries.
Residential property taxes are made up of several levies, including city taxes, county taxes, school district taxes, and junior college taxes, each of which have a different tax rate and are bundled together to create the effective tax rate applied to each property.
For example, a home in Brazos County may be taxed at 1.25% for school district taxes, 0.5% for each of city and county taxes, and 0.25% for community college taxes; a home in Dallas County, on the other hand, might be taxed at 1.75% for school district taxes, 0.45% for each of city and county taxes, and 0.3% for community college taxes.
The first home has an effective tax rate of 2.5%, and the second home has an effective tax rate of 2.95%. The average effective tax rate across the state is 1.69%, and it varies not only from county to county but even from city to city. Cities can only raise property tax rates within a small margin each year, as local governments are now prohibited from increasing total revenue from property taxes more than 3.5% without a vote.
However, the effective tax rate your property faces is only part of the story. It’s also important to consider the assessed value of your property, which (in conjunction with the tax rate) determines how much you owe to your district.
Your local tax appraisal district will assess the value of your home at least once every three years. While there are numerous different calculations for appraising a property’s value, most governments assess residences based on their general market value by determining the value of the (i) land and (ii) structures on the land.
Factors such as market demand, age of the property, improvements you’ve made to your home, and more will impact the appraised value of your home. Even the value of nearby properties can be a weighing factor when the government assesses your property value from year to year.
Once the government assesses the value of your home, it is multiplied by the effective property tax rate your property is subject to, and the resulting dollar value is the amount of property taxes you pay. For example, a $500,000 home with a 2.1% effective rate would have a bill of $10,500.
There are several strategies for changing either your effective tax rate or your property’s assessed value, which we’ll explore later in this article.
Related: What Real Estate Agents and Clients Should Know About Property Taxes
Property Taxes: What to Expect As Soon As You Buy a Texas Home
If you’ve just bought a new home in Texas, congratulations! Finding a home you love and having your offer accepted can remove a lot of weight from your shoulders. But along with your down payment, inspector fees, and assorted closing costs, there are a few ways property taxes can start immediately impacting your finances. Here are some costs and calculations to keep in mind as you settle into your new home:
Prorated Taxes
In Texas, property tax bills go out in October and are due in January. It’s your title company’s job to make sure you own your home’s title free and clear — and that includes there not being any property tax liens on the property. At closing, you may owe the seller a portion of the annual property taxes. Alternatively, depending on the bookkeeping, they may owe you a credit back!
Escrow Account
If you have a mortgage on your home, then the mortgage payments you make each month probably have three portions: the mortgage itself (comprised of the principal and the interest), your house insurance, and an approximately 1/12-sized portion of your estimated property tax bill.
Your lender will collect and hold the tax portion of your monthly payment in an escrow account, and that collected money is used to pay the bill. This makes your monthly spending a bit bigger, but it means you don’t have to worry about a sudden multi-thousand-dollar bill due at the end of January.
A Jump in Anticipated Property Taxes
Your property taxes are likely to be higher than the property taxes the previous owner paid, even compared to the last amount they paid. Why? There are three main factors:
- The selling price of the house raised the assessable value of the property.
- Your city may be in the middle of a high-demand real estate market. Many Texas areas are, and that’s raising property taxes for everyone.
- The cap preventing a sharp increase in the assessed property value went away. Home values are capped at ten percent increases if the property has a general homestead exemption, and your property doesn’t have one in place, or it has been reset.
What Are Texas Property Tax Exemptions?
Residential properties in Texas are eligible for tax exemptions, which operate as discounts for some or all of the tax levies you’re obligated to pay. Depending on your or your spouse’s individual circumstances, such as a disability or owning this property as a primary residence, you qualify for certain reductions in the property taxes you must pay. There are two key benefits homeowners can receive from property tax exemptions. They are:
1. Reduce Your Property Tax Bill
This first benefit is the biggest and most obvious: you can reduce your tax bill by making part of your home’s property value “off limits” in tax calculations. For example, homestead exemptions take $40,000 out of the calculation of your school district levy payments; a 100% disabled veteran exemption removes 100% of your obligation to pay.
2. Control the Tax Bill Total for Years to Come
Many property tax exemptions also cap potential increases, so people on a tight budget or a fixed income don’t have to worry about price surges in the future. For example, a homestead exemption ensures that your tax appraisal district can’t raise your home’s assessed value by more than 10% (excepting any improvements you made to the property). Also, provisions for qualifying homeowners aged 65 and older cap school district tax payments, so they never get higher.
Four Property Tax Exemptions You Need to Know About
If you’re new to owning a home in Texas, it’s important that you apply for all property tax exemptions you may be eligible for as soon as possible. While some districts may automatically qualify you for some options, it’s best to be thorough and double-check your standing. Four exemptions you and your new home may be eligible for are:
- General Residential Homestead Exemption: This is the most common option for homeowners. It removes $40,000 from your property’s value for the purpose of school district tax calculations, which can save you hundreds of dollars each year. It also stops your assessed property value from rising astronomically each year.
- 65-and-Older Exemption: This provision exempts a further $10,000 from school district tax calculations and can freeze certain levies at their current dollar values.
- Disabled Homeowner Exemption: This also grants a $10,000 exemption, but it can’t be used in conjunction with the previous option.
- Disabled Veteran Homeowner Exemption: Disabled veterans receive different discounts based on their disability rating established by the VA, with up to 100% of property tax obligations waived.
Related: The Best Ways to Get Texas Property Tax Relief
Another Route to Texas Property Tax Relief for Residential Homebuyers: Protesting Your Property Taxes
Property tax exemptions generally control your effective property tax rates. You can also potentially change your property tax bill amount by protesting your home’s assessed value. If you think the county’s assessment of your property includes errors, makes too many assumptions about your property, or doesn’t reflect your home’s present condition, you can file a protest with the tax authority. This is a standard process that many homeowners use to reduce their bills further.
Get the Support You Need to Manage Your Property Tax Protest
At Home Tax Shield, we help homeowners protest their home’s assessed value, so they pay a fair property tax bill. We can manage the process of filing your protest, providing evidence about what your home’s assessed property value should be, and meeting with county assessors or officials on your behalf. Contact us today to get started!
