Many homebuyers and even some veteran homeowners don't understand how property taxes in Texas are determined. Texas property taxes are somewhat confusing, and there are a few factors that determine the amount of taxes a homeowner will owe on their property.
While it is very common for homebuyers to compare homes based on the property tax rate, there are actually THREE main factors that determine the total amount of property taxes that each homeowner will owe every year, which are:
- THE TAX RATES adopted by each respective taxing entity (City, County, School District, plus some additional entities and special districts).
- THE APPRAISED VALUE of a home as determined by the county appraisal district's appraiser.
- PROPERTY TAX EXEMPTIONS offered by each taxing entity that excludes part of a property's value from taxation. Each city, county and school district has a list of the respective exemptions they allow.
And here's a breakdown of these three factors:
There are three main taxing entities that each homeowner will typically have to pay:
City Tax Rates are determined by each city based on their operating budget each year. The tax rate itself is not determined by voters, but is determined by elected officials. City taxes pay for services such as the police and fire departments, as well as many other expenses necessary to the operation of the city. Homes that lie in unincorporated areas of a county typically do not have to pay city taxes, although they may have other taxing entities, such as MUD districts.
School Tax Rates are set each year by the school board of each district based on their operating budget for the following year. School taxes in Texas pay for a large percentage of the cost of teacher and staff salaries, as well as building maintenance and other expenses. School districts also receive money each year from the state and federal government.
The Texas Constitution sets a cap on the tax rate that school districts are allowed to charge. However, the school board does have the option of calling a special election to let the voters decide to exceed that cap if they deem it necessary to raise additional funds because of a budget shortfall.
County Tax Rates are also set once a year by county officials based on their operating budget. County taxes pay for services such as the Sheriff's department, county road maintenance and county employees' salaries and expenses.
Some counties have additional taxing entities that collect for other expenses, such as county hospitals and colleges. For example, Dallas county has a tax for Parkland Hospital and the Community College District, but these are generally referred to as part of the "county tax rate" as they are part of the services offered to residents of the county itself.
Additionally, there are some special taxing districts that may exist in some areas. A Municipal Utility District (MUD) is a special taxing entity created to provide water, sewer and sometimes other utility services in an unincorporated part of a county that is being developed. Once the cost of developing the utility infastructure is recovered or the area is incorporated into a city, the MUD tax usually goes away.
Property taxes are "ad valorem" taxes, which means they are taxed "according to value". The appraised value of a home is determined by the central appraisal district in each county once a year between January 1 and April 30th. The methodology used to determine the appraised value of a home may vary from one county to the next, but Texas state law requires it to be a uniform system within each county.
Despite the fact that there may be several entities that collect taxes for each home, the appraised value is always determined by the county appraisal district in which the home lies. The value they assign to the home applies to each taxing entity. In other words, the appraised value determined by the county for each home is used to calculate taxes for the city, county and school. Each entity does not perform a seperate appraisal (although this used to be how it worked until 1979).
And contrary to popular belief, the tax appraised value is often not the same as the actual market value of a home at any given time. The price a home may sell for on the market may be higher or lower than the tax appraised value because the real estate market changes from month to month.
Market value is defined as the price a willing seller will sell and a willing buyer will pay for a home at any given time. When a home is sold to a buyer obtaining a mortgage, the lender will typically require a new appraisal to be performed by a licensed appraiser. This appraiser may consider many of the same factors as the county appraiser did to determine the tax value, but their opinion of value may vary significantly from the tax appraiser's value based on recent market data.
Home buyers and sellers should always have their Realtor® provide a list of recent sales that have comparable features to the home to help determine the current market value. Most lenders and appraisers will not consider comparable sales that have sold more than six months ago, and most are focusing most heavily on sales that have occured within the last three months since real estate values have been declining in many parts of the country for the last few years.
PROPERTY TAX EXEMPTIONS
A property tax exemption is a reduction of the appraised value granted to homeowners based on certain qualifying criteria. The amount of the exemption is subtracted from the home's appraised value and then the tax rate is factored into to this result to calculate the amount of tax owed.
Some entities calculate exemptions based on dollar amounts, whereas others base them on a percentage of the home's appraised value. Each county maintains a list of exemptions for each taxing entity.
Here's a list of the most common exemptions allowed in Texas:
A HOMESTEAD EXEMPTION is a deduction allowed for a homeowner's homestead property (primary residence). Each person is only allowed to claim one home as a homestead, regardless of whether or not they own additional homes in other counties or states. To claim a homestead exemption, a homeowner will need to complete and file a short form with the county appraisal district. There is no cost to file a homestead exemption, but the homeowner must occupy the property on January 1st of the year in order to claim the deduction for that calendar year's taxes. Homestead exemptions can typically only be filed between January 1 and April 30th of each year.
AN OVER 65 EXEMPTION is a deduction for senior citizens. Each senior citizen is only allowed to claim the exemption on one home. If only one spouse is over 65, most taxing entities will at least allow a partial credit to be taken. In addition, many will grant the full exemption to the surviving spouse of a homeowner who was over 65. Some taxing entities allow an "over 65 cap" on a property's value once the exemtion is filed, which means the taxable value of the home is frozen and cannot increase from that point forward even if the home increases in value.
A DISABILITY EXEMPTION is a deduction allowed for homeowners who are disabled. In order to qualify for this exemption, a homeowner must meet the social security definition of disabled. Homeowners who receive benefits from the Federal Old Age Survivors and Disability Insurance Program will qualify, but receiving disability income from a former employer or insurance company doesn't automatically qualify them for the exemption. Also, documentation that the homeowner has a chronic illness that is expected to result in death will often times be enough to obtain the exemption. DISABLED VETERANS can also claim an additional exemption in many tax districts.
These exemption amounts vary from one taxing entity to the next, and can have a significant impact on a homeowner's tax liability. This is the main reason why simply comparing tax rates doesn't always show an accurate picture of the true cost of property taxes for each city. However, exemptions are typically not allowed on investment (non-owner occupied) properties, so investors may find it useful to compare the various tax rates for each city.
Property taxes are required to be paid each year regardless of a homeowner's income and also regardless of whether or not they have a mortgage on the home. Depending on a homeowner's down payment, interest rate and terms of their mortgage, property taxes can make up as much as 30-40% of the total monthly cost of home ownership.
Most mortgages today are "budget loans", which means the lender requires the taxes and insurance to be collected along with the monthly mortgage payment. This means the payment itself is higher than if the homeowner was paying their taxes each year directly to the county, but also keeps the homeowner from having to budget and save for taxes seperately from the mortgage payment.
In the case of a budget loan where taxes are escrowed, the homeowner's mortgage company will receive and pay the tax bill at the end of each year. If the amount of taxes is higher than the mortgage company collected, the monthly payment will usually increase within 2-4 months after the taxes are paid. So even if a homebuyer obtains a fixed rate mortgage, the actual amount of the monthly payment may increase if the property taxes increase. And likewise, it can decrease if the taxes go down.
Conventional loans, such as Fannie Mae and Freddie Mac, will typcially give buyers the option of "waiving escrows" if they make a down payment of at least 20%. However, FHA, VA and USDA loans all require the homeowner to pay taxes and homeowner's insurance as part of their monthly payment regardless of their down payment.