A volatile real estate market can make appraised values unpredictable for Texas homeowners where taxes are already high compared to other states. The Texas Homestead Cap is one way to limit the risk of an increase to your property tax burden.
In this article, we’ll explain what the homestead cap is and the eligibility requirements.
Is there a cap on property taxes in Texas?
There are generally two forms of a cap in Texas.
- Property tax rates are set by local governments rather than the state. These taxes fund local taxing units like school districts, cities, and counties. Each year, these units set a budget, which helps determine tax rates for that year. That rate can vary annually. A cap on a tax rate could be the product of a law that prohibits a tax entity from raising property tax revenues (budgets) beyond 3.5% without voter approval. This limitation may result in what is known as “compression” to the tax rate.
- The other and more commonly known cap is 10% to an appraised value. This is known as the homestead cap or capped value.
The capped value is very often used interchangeably with taxable value. However, the difference between capped and taxable are the amount of exemptions removed from capped to get to taxable.
How does the homestead cap work?
Texas Property Tax Code requires that all taxable property must be valued at 100% of the market value as of January 1 each year.
The homestead cap sets a limit on the annual increase to your homestead’s appraised value. The capped value is the lesser of 1) the market value or 2) the previous year’s appraised value, plus an additional 10% increase.
Here’s how it works. Let’s say your home had an appraised value of $500,000 last year. This year, the market value of your home is $600,000. Because the market value is 20% higher than the sum of last year’s appraised value plus a 10% increase, your homestead capped value would be $550,000. This value assumes there were no home improvements done to the home.
Remember, the appraiser’s opinion of your market value has no cap; it reflects the current market conditions. This is why you could see market value and appraised value differ on your Notice of Appraised Value. The difference is the homestead cap loss.
Are there exceptions to the homestead cap?
Yes, there are some things to be aware of to ensure that you qualify for the homestead cap. First, the property must qualify as a homestead. A homestead is used for residential purposes and is up to 20 acres.
The cap only applies to a property granted a residence homestead exemption. The limitation takes effect January 1 of the tax year following the year in which the owner qualifies for the exemption.
The cap only applies to your primary residence, or the property that qualifies under the homestead exemption. You cannot use it on multiple properties.
Finally and most importantly, the 10% limit excludes any additional improvements. The appraised value for a residential homestead is allowed to increase 10% plus the market value of any additional improvements made since the preceding year’s appraisal.
Let’s refer back to the previous example of a home capped at $550,000. If you also made home improvements that were worth $25,000, your cap value would be $575,000.
The annual increase is still less than the market value, so the appraised value of the home would be $575,000 under Section 23.23(a) of the Texas Property Tax Code.
For more information to help you save on property taxes, visit the NTPTS blog or get in touch with our property tax consultants for information on our services.