Texas Property Taxes in a Nutshell
Nutshell (define): A simple explanation of a confusing system or problem.
Texas has no state income taxes therefore property tax is the largest source of funding for local services.
Property taxes help to pay for public schools, city streets, county roads, police, fire protection and many other services including community colleges.
Property taxes are based on the value of the property. For example, the property tax on a vacant lot valued at $10,000 is ten times as much as one valued at $1,000.
Property taxes are local taxes. Your local officials value your property, set your tax rates, and collect your taxes. However, state law governs how the process works.
The property tax provides more tax dollars for local services in Texas than any other source. Property taxes help to pay for public schools, city streets, county roads, police, fire protection, and many other services.
Five Constitutional Rules
The Texas Constitution sets out five rules for the property tax.
1. Taxation must be equal and uniform. All property must be valued and taxed equally and uniformly. This applies to similar types of property (for example, all residential homes) and to differing types of property (for example, commercial properties and utility properties). No single property or type of properties should pay more than its fair share of taxes.
2. With some exceptions, all tangible property must be taxed on its current market value. The exceptions include agricultural land and timberland. A property's market value is the price for which it would sell when both buyer and seller want the best price and neither one is under pressure to buy or sell. Land used for farming and ranching can be valued on its capacity to produce crops or livestock, instead of its value on the real estate market. This appraisal is known as agricultural appraisal. Special timberland appraisal is also available to property owners whose land produces timber for products.
3. All property is taxable unless a federal or state law provides an exemption for it. An exemption excludes all or part of a property's value from taxation.
4. Property owners have a right to reasonable notice of increases in appraised property value.
5. Each property in a county must have one appraised value. The Legislature may provide for exceptions for a property that is part of a governmental unit, such as a school district, whose boundaries cross county lines.
How does the system work?
How does the system work?
There are three main parts to the property tax system in Texas:
1. An appraisal district in each county sets the value of your property each year. A chief appraiser is the chief administrator. So each county has one commonly referred to as a CAD district. Too find the one in any area of the state is as easy as Google-ing the name of the county and CAD. For example Galveston County Texas CAD will direct you to the appraisal district for Galveston County Texas.
2. An appraisal review board (ARB) settles any disagreements between you and the appraisal district about the value of your property. Your initial appeal place, when your property is in your opinion appraised too high.
3. Local taxing units, which include the county, city, school district, and special districts, decide how much money they will spend. This determines the total amount of taxes that you and your neighbors will pay. Herein lays the problem when discussing Texas property taxes statewide. In order to know the actual tax rate of a given piece of property one must know which districts the property is located within. This is not all that difficult to find out by using the CAD office and the address of the property. However due to the nature of the property tax system a house a few miles down the street might have a different tax rate due to which districts it is actually located in.
The system has four stages: valuing the taxable property, protesting the values, adopting the tax rates, and collecting the taxes.
January 1 marks the beginning of property appraisal. What a property is used for on January 1, market conditions at that time, and who owns the property on that date determine whether the property is taxed, its value, and who is responsible for paying the tax.
Between January 1 and April 30, the appraisal district processes applications for tax exemptions, agricultural appraisals, and other tax relief.
Around May 15, the appraisal review board begins hearing protests from property owners who believe their property values are incorrect or who did not get exemptions or agricultural appraisal. The ARB is an independent panel of citizens responsible for handling protests about the appraisal district's work. When the ARB finishes its work, the appraisal district gives each taxing unit a list of taxable property.
In August or September, the elected officials of each taxing unit adopt tax rates for their operations and debt payments. Several taxing units tax your property. Every property is taxed by the county and the local school district. You also may pay taxes to a city and to special districts such as hospital, junior college, water, fire, and others.
Tax collection starts around October 1 as tax bills go out. Taxpayers have until January 31 of the following year to pay their taxes. On February 1, penalty and interest charges begin accumulating on most unpaid tax bills. Tax collectors may start legal action to collect unpaid taxes on February 1.
What is the taxpayer's role?
You can play an effective role in the process if you know your rights, understand the remedies available to you, and fulfill your responsibilities.
- You have the right to equal and uniform tax appraisals. Your property value should be the same as similar properties.
- You have the right to have your property taxed on its market value or its agricultural value if it qualifies for agricultural appraisal.
- You have the right to receive all tax exemptions or other tax relief for which you qualify and apply timely.
- You have the right to notices of changes in your property value or in your exemptions.
- You have the right to know about a taxing unit's proposed tax rate increase and to have time to comment on it.
Understand your remedies:
- If you believe your property value is too high, or if you were denied an exemption or agricultural appraisal, you may protest to the ARB. If you don't agree with the review board, you may take your case to court.
- You may speak at public hearings when your elected officials are deciding how to spend your taxes and setting the tax rate.
- You and your fellow taxpayers may limit major tax increases in an election to roll back or limit the tax rate.
- You must apply for the general, over-65, disabled, or any local-option homestead exemptions before the deadlines in the appraisal district where your property is located. If your property is located in a taxing unit that overlaps into two or more counties, you need apply only at one county appraisal district.
- You must apply for other exemptions, agricultural appraisal, and other forms of tax relief before the deadlines.
- You must see that your property is listed correctly on the tax records with your correct name, address, and property description. You must pay your taxes on time.
An exemption removes part of the value of your property from taxation and thus lowers your tax bill. For example, if your home is valued at $50,000 and you qualify for a $15,000 exemption, you pay taxes on your home as if it were worth only $35,000. Other than exemptions offered to disabled veterans or their survivors, these exemptions apply only to your homestead and not to any other property you may own.
To qualify for a general homestead exemption, you must own your home on January 1. You can qualify for the over-65 or disabled homeowner exemptions (see below) as soon as you turn 65 or become disabled, as long as you own the home and live in it as your principal residence. You will receive the exemption back to January 1 of that tax year.
Your homestead can be a separate structure, condominium or mobile home located on leased land, as long as you own the home itself. Your homestead includes your house and the land used as your yard, not to exceed 20 acres.
If you have more than one house, you can receive exemptions only for your main or principal residence. You must live in this home on January 1. A person may not receive a homestead exemption for more than one residence homestead in the same year.
If you temporarily move away from your home, you can still receive an exemption as long as you intend to return and do not establish another principal residence. “Temporarily” means an absence of less than two years. An absence for military service or a stay in a facility providing services related to health, infirmity or aging, however, may be longer. For instance, if you enter a nursing home, your home still qualifies as your homestead if you intend to return to it, even if you are away for more than two years.
Renting part of your home or using part of it for a business does not disqualify the rest of your home for the exemption.Note: Texas has two distinct laws for designating a homestead. The Texas Tax Code offers homeowners a way to apply for homestead exemptions to reduce local property taxes. The Texas Property Code allows homeowners to designate their homesteads to protect them from a forced sale to satisfy creditors. This law doesn’t, however, protect homeowners from tax foreclosure sales of their homes for delinquent taxes. If you owe property taxes on your home or the IRS they can sell your home to satisfy the taxes. What else is new?
- School Taxes — All Homeowners
Any taxing unit, including a school district, city, county or special district, may offer you an exemption for up to 20 percent of your home’s value, with a minimum of $5,000. For example, if your home is valued at $20,000 and your city offers a 20 percent exemption, your exemption is $5,000, even though 20 percent of $20,000 is $4,000.Each taxing unit decides whether to offer the optional exemption and at what percentage, and must do so before July 1 of the tax year to offer that year. This exemption is added to any other home exemption for which you qualify.
If you are 65 or older, your residence homestead qualifies for more exemptions.
Seniors qualify for a $10,000 homestead exemption for school taxes in addition to the $15,000 exemption offered to all homeowners.
If you qualify for both the $10,000 exemption for over-65 homeowners and the $10,000 exemption for disabled homeowners (see the following section), you must choose one or the other for school taxes; you cannot receive both.
In addition to the $10,000 exemption for school taxes, any taxing unit—including a school district—can offer an additional exemption of at least $3,000 for taxpayers aged 65 or older.
When you receive an over-65 homestead exemption, you also receive a “tax ceiling” for your total school taxes; that is, the school taxes on your home cannot increase as long as you own and live in that home. The tax ceiling is set at the amount you pay in the year that you qualify for the over-65 homeowner exemption. The school taxes on your home subsequently may fall below the ceiling, but cannot rise above it.
The county, city or a junior college district also may freeze or limit your taxes by adopting a tax ceiling based on new law for tax year 2004. The ceiling goes into effect after the unit adopts the limitation and you qualify your home for the over-65 exemption.
Tax ceilings can go up if you improve your home (other than by normal repairs and maintenance). For example, if you add a garage or a room to your home, your tax ceiling can rise. It will also change if you move to a new home.
If you do not claim another homestead in the same year, you will receive the over-65 exemption for the full year. If you claim another homestead during the same year, you will no longer qualify for the exemption on the old home for the remaining portion of that year. Taxing units will prorate the taxes based on the number of days elapsing after you no longer qualify for the exemption, to the end of the year.
If you purchase another home anywhere in Texas, you may transfer the percentage of school tax paid based on your former home’s over-65 school tax ceiling to your new home. For example, if you currently have a tax ceiling of $100, but would pay $400 in school taxes without the tax ceiling, the percentage of tax paid is 25 percent. If the taxes on your new home are $1,000, the new school tax ceiling would be $250, or 25 percent of $1,000. You may request a certificate from the appraisal district for the former home to take to the appraisal district for your new home, if it is in a different district.
To transfer your tax ceiling for the purposes of county, city or junior college district taxes, however, you must move to another home in the same taxing unit.
When homeowners who have been receiving the senior exemption and tax ceiling die, these transfer to the surviving spouses, as long as they are 55 or older at their spouse’s death and live in and own the home. The survivors should apply to their appraisal district to transfer the exemption. If your spouse dies in the year of his or her 65th birthday, but has not applied for the over-65 exemption, you may apply for it as the surviving spouse. The exemption remains in effect for as long as the survivor owns and lives in the home. If a surviving spouse, aged 55 or older, purchases another home, he or she may transfer the percentage of tax paid based on the former home’s tax ceiling to the new home. (See the example above about the percentage of tax to be paid.) Again, to retain the county, city or junior college district tax ceiling, the new home must be in the same taxing unit.
Homeowners aged 65 or older who apply for the exemptions also may pay their home taxes in installments.
If you are a homeowner aged 65 or older, you may “defer” or postpone paying any property taxes on your home for as long as you own and live in it. To postpone your tax payments, file a “tax deferral affidavit” with your appraisal district. You may suspend any lawsuit by filing this affidavit with the court or stop a pending tax sale by filing the affidavit with the officer conducting the sale and the appraisal district, taxing unit or taxing unit’s delinquent tax attorney. The deferral applies to all property taxes levied by the taxing units that tax your home.A tax deferral, however, only postpones your tax liability. It doesn’t cancel it. Interest on the sum due accrues at the rate of 8 percent a year. Once you or your surviving spouse no longer own your home or live in it, past taxes and interest become due 181 days later. Any penalty and interest that was due on the tax bill for the home before the tax deferral will remain on the property and become due when it ends.
- An inability to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or has lasted or can be expected to last for a continuous period of not less than 12 months
- Blindness, meaning vision of 20/200 or less in the better eye with the use of a correcting lens, in persons aged 55 or older.
If you qualify for disability benefits under the federal Old Age, Survivors and Disability Insurance Program administered by the Social Security Administration, you will qualify for homestead exemptions.
Disability benefits from any other program do not automatically qualify you for this exemption. Contact your appraisal district for assistance on what information you will need to show the district that you are disabled.
If disabled, you will
qualify for a $10,000 exemption for school taxes in addition to the $15,000 exemption granted to all homeowners. In addition, any taxing unit may offer an exemption of at least $3,000 off of home value to homeowners with disabilities.
Beginning in tax year 2004, disabled homeowners will have a ceiling imposed on their school taxes similar to that provided to over-65 homeowners, with the ceiling set at their 2003 school tax bill on their homesteads, if they qualified on or before January 1, 2003. Disabled homeowners who qualify their homes in 2004 or thereafter set their tax ceiling based on the amount they pay in the year in which they first qualify. The school taxes on your home then cannot increase as long as you own and live in it. School taxes on your home may fall below the ceiling, but will not rise above it.
A county, city or junior college district also may freeze or limit your taxes by adopting a tax ceiling based on new law for tax year 2004. The ceiling goes into effect after the unit adopts the limitation and you qualify your home.
Your tax ceiling may rise if you improve your home (other than by normal repairs or maintenance). For example, if you add a garage or a room to your home, your tax ceiling can go up. Your tax ceiling also will change if you move to a new home. The ceiling does not expire, however, when a disabled owner conveys his or her interest in the home to a trust, if the owner-trustor continues to occupy the home.
If you do not claim another homestead in the same year, you will receive disabled exemptions for the full year. If you do claim another homestead during the same year, you will no longer qualify for the exemption on the old home for the remainder of that year. Your taxes will be prorated based on the number of days that elapse after you no longer qualify for the exemption.
As with the over-65 exemption, if you purchase another home in Texas, you may transfer your former home’s school tax ceiling to the new one. To do so, you must qualify your former home for the exemption in 2003 or afterward. You may request a certificate from the appraisal district for your former home to present to the appraisal district for your new home. Again, for exemption from taxes levied by a county, city or junior college district, you must transfer the tax ceiling to another home in the same taxing unit.
When homeowners who receive disabled homeowner exemptions die, the exemptions transfer to their surviving spouses, if they are 55 or older at their spouse’s death and live and have ownership in the home. Survivors should apply to the appraisal district to transfer these exemptions. The exemptions remain in effect for as long as the survivors own and live in their homes. If the surviving spouse, aged 55 or older, purchases another home, he or she may transfer the former home’s school tax ceiling to the new home; for taxes levied by a county, city or junior college district, the tax ceiling can be transferred only to another home in the same taxing unit.
Disabled homeowners who apply for homestead exemptions also may pay their home taxes in installments.
Disabled homeowners may defer or postpone paying any property taxes on their homes for as long as they own and live in them. To postpone your tax payments, file a “tax deferral affidavit” with your appraisal district. You also may suspend any lawsuit by filing an affidavit with the court or stop the home’s tax sale by filing the affidavit with the officer conducting the sale and the appraisal district, taxing unit or taxing unit’s delinquent tax attorney. This deferral applies to all property taxes of the taxing units that tax your home.
A tax deferral, however, only postpones your tax liability. It doesn’t cancel it. Interest on the sum due accrues at the rate of 8 percent a year. Once you or your surviving spouse no longer own your home or live in it, past taxes and interest become due 181 days later. Any penalty and interest that was due on the tax bill for the home before the tax deferral will remain on the property and become due when it ends.
Are you a disabled veteran or survivor?
You may qualify for a property tax exemption if you are either (1) a veteran who was disabled while serving with the U.S. armed forces or (2) the surviving spouse or child (under 18 years of age and unmarried) of a disabled veteran or a member of the armed forces who was killed while on active duty.
You must be a Texas resident to receive this exemption. You also must have documents from either the Veterans’ Administration or the appropriate branch of the armed forces showing the percentage of your service-related disability. Your disability rating must be at least 10 percent.
If you are a surviving spouse or child, you must have the veteran’s disability records. You may need other documents as well, such as proof of marriage or age.
This exemption ranges from $5,000 to $12,000, depending on the extent of the disability. This exemption is not only for a home; you can apply it to any property you own on January 1. You may pick only one property to receive the exemption, however.
So you bought a new home. Here is what to do:
Before you buy a home, you or your mortgage company should obtain a tax certificate for the home from all jurisdictions that tax it. The tax certificate will show whether delinquent taxes are owed on the property; you can’t get a clear property title until you have paid all delinquent taxes.
Before you buy a home, you or your mortgage company should obtain a tax certificate for the home from all jurisdictions that tax it. The tax certificate will show whether delinquent taxes are owed on the property; you can’t get a clear property title until you have paid all delinquent taxes.
If your mortgage company pays property taxes on your home out of an escrow account, make sure the taxing units send original tax bills to the company. You may want to request a receipt to verify that the mortgage company pays these taxes on time, and to use for federal income tax purposes.
You should apply to the appraisal district for a residence homestead and any other exemptions. You must apply to the appraisal district that appraises your home. If your property is valued by more than one appraisal district, you must file the exemption application in each district office.
If you sold your previous home in Texas, make sure it’s listed under the new owner’s name and address.
If your home is new, you should receive a notice of appraised value from your appraisal district in April or May; contact the district if you don’t receive it, or if it does not list all taxing units to which you will owe taxes.
If you no longer qualify for the general, over-65 or disabled homestead exemption, you should notify the appraisal district in writing. If you fail to do so and don’t pay your taxes in full, you will face a 50 percent delinquent tax penalty, plus interest.
To File for an Exemption on Your Home
1. Obtain an application form at your local appraisal district office. (A separate application is needed for the disabled veteran’s exemption.)
2. Return the form(s) to the appraisal district office after January 1 but no later than April 30.
3. Provide all the information and documentation requested. For example, if you are claiming an over-65 or disabled exemption, you may need to show proof of age or disability. Remember that making false statements on your exemption application is a criminal offense.
4. If your property is valued by more than one appraisal district, you must file an exemption application in each appraisal district office. This can occur when your property is located in a taxing unit that crosses county lines. Contact your appraisal district if you aren’t sure.
5. You may file for a homestead exemption and/or a disabled veteran’s exemption up to one year after the date upon which taxes become delinquent. You will receive a new tax bill with a lower amount, or a refund if you have already paid. 6. If you turn 65 this year, you may file for the over-65 exemption up to one year from the date upon which you turned 65.
7. If the chief appraiser asks you for more information by sending you a written request, you have 30 days to reply from the postmark date.
8. If the chief appraiser denies or modifies your exemption, he or she must notify you in writing within five days. This notice must explain how you can protest before the ARB.
9. Once you receive a homestead or disabled veteran’s exemption, you don’t have to apply for it again unless the chief appraiser asks you to do so or unless your qualifications change. If you move to a new home, you must fill out a new application to receive exemptions on the new home and to transfer any tax ceiling. If you become disabled or turn 65, you should file a new application that year to receive more exemptions.
10. The chief appraiser may require you to submit a new application by sending you a written notice and an application form. If you don’t return it, you may lose your exemptions.
- Always check with the local CAD in which your property is located to determine which taxing districts have authority over your property.
- Make sure you timely file and claim every exemption you are entitled to under the law.
- Closely review any new appraisals of you property by your local CAD and timely appeal any upward adjustments if warranted. Check the appraised value of similar properties in your neighborhood. If yours is too high in comparison then consider appeal to your ARB.
- When selecting property review the taxes before making an offer. Know your exposure.
Keep in mind that being close to a city but not in it can save you money on your property taxes. In effect you can enjoy the city amenities without paying for them.
Example, The Biscayne and the Audubon Village Resort on the Bolivar Peninsula has a lower tax rate than comparable property in the city of Galveston because they are not taxed by the city of Galveston.
A similar situation exists in the Matagorda Bay Area at The Sanctuary at Costa Grande near Port O'Connor and Beachside near Palacios.
These examples are in the emerging markets on the Texas Gulf Coast, with bright futures, transforming new resort developments and lower taxes.
We have an upcoming article on our emerging markets, but in a nutshell:
The Bolivar Peninsula area is going to be the benefactor of billions of dollars coming from new nearby refinery plants.
The Matagorda Bay area is going to be the benefactor of a new nearby nuclear power plant.
Most Importantly, both the Bolivar Peninsula and the Matagorda Bay area are being transformed into resort areas with several major new developments on a grand scale.
Good researching skills while searching for properties can result in much tax savings. A little time spent on the Internet is well worth the time.
Tax Rules for Second Homes
Believe it or not, a change in the tax law gets a lot of credit for a recent boom in the number of Americans buying second homes. The change allows most home sellers to take up to $500,000 of profit tax free. Before 1997, sellers generally had to buy a more expensive home to avoid being taxed on profit from a sale. Now you can trade down to a less expensive house and use profit from the sale of the big place as a down payment on a second home.
A recent study found that more than one in five second-home buyers were using equity from the sale of a primary residence to finance their purchase. There's no doubt that many baby boomers are in their peak-earning years and therefore more able to afford a second home. And, rapid price appreciation of homes in many areas has certainly stoked demand for second homes as terrific investments. Here's a quick look at the tax rules for second homes.
If you use the place as a second home -- rather than renting it out as a business property -- interest on the mortgage is deductible just as interest on the mortgage on your first home is. You can write off 100% of the interest you pay on up to $1 million of debt secured by your first and second homes and used to acquire or improve the properties. (That's a total of $1 million of debt, not $1 million on each home.) The rules that apply if you rent the place out are discussed later.
You can deduct property taxes on your second home, too. In fact, unlike the mortgage interest rule, you can deduct property taxes paid on any number of homes you own.
If You rent the home. Lots of second-home buyers rent their property part of the year to get others to help pay the bills. Very different tax rules apply depending on the breakdown between personal and rental use.
If you rent the place out for 14 or fewer days during the year, you can pocket the cash tax-free. Even if you're charging $5,000 a week, the IRS doesn't want to hear about it. The house is considered a personal residence, so you deduct mortgage interest and property taxes just as you do for your principal home.
Rent for more than 14 days, though, and you must report all rental income. You also get to deduct rental expenses, and that gets complicated because you need to allocate costs between the time the property is used for personal purposes and the time it is rented.
If you and your family use a beach house for 30 days during the year and it's rented for 120 days, 80% (120 divided by 150) of your mortgage interest and property taxes, insurance premiums, utilities and other costs would be rental expenses. The entire amount you pay a property manager would be deductible, too. And you could claim depreciation deductions based on 80% of the value of the house. If a house is worth $200,000 (not counting the value of the land) and you're depreciating 80%, a full year's depreciation deduction would be $5,800.
You can always deduct expenses up to the level of rental income you report. But what if costs exceed what you take in? Whether a loss can shelter other income depends on two things: how much you use the property yourself and how high your income is.
If you use the place more than 14 days, or more than 10% of the number of days it is rented -- whichever is more -- it is considered a personal residence and the loss can't be deducted. (But because it is a personal residence, the interest that doesn't count as a rental expense -- 20% in our example -- can be deducted as a personal expense.)
If you limit personal use to 14 days or 10%, the vacation home is considered a business and up to $25,000 in losses might be deductible each year. That's why lots of vacation homeowners hold down leisure use and spend lots of time "maintaining" the property. Fix-up days don't count as personal use. The tax savings from the loss (up to $7,000 a year if you're in the 28% tax bracket) help pay for the vacation home. Unfortunately, holding down personal use means forfeiting the write-off for the portion of mortgage interest that fails to qualify as either a rental or personal-residence expense.
We say such losses might be deductible because real estate losses are considered "passive losses" by the tax law. And, passive losses are generally not deductible. But, there's an exception that might protect you. If your adjusted gross income (AGI) is less than $100,000, up to $25,000 of such losses can be deducted each year to offset income such as your salary. (AGI is basically income before subtracting your exemptions and deductions.) As income rises between $100,000 and $150,000, however, that $25,000 allowance disappears. Passive losses you can't deduct can be stored up and used to offset taxable profit when you ultimately sell the vacation house.
Although the rule that allows home owners to take up to $500,000 of profit tax free applies only to your principal residence, there is a way to extend the break to your second home: Make it you principal residence before you sell. That's not as wacky as it might sound. Some retirees, for example, are selling the big family home and moving full time into what had been their vacation home. Once you live in that home for two years, up to $500,000 of profit can be tax free. (Any profit attributable to depreciation while you rented the place, though, would be taxable. Depreciation reduces your tax basis in the property and therefore increase profit dollar for dollar.)
Texas County Appraisal Districts