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.
Cap on Tax Rate
First, 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.
Homestead Cap
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 fair 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.
It’s important to know the difference between fair market value and capped appraisal value:
- Market value reflects the price your property could sell for under current marketing conditions.
- Capped appraisal value is an objective value determined by a professional appraiser based on the property’s condition.
In a seller’s market, for instance, the market value of a property might be higher than an appraised value, resulting in more property taxes.
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.
In a seller’s market, for instance, the market value of a property might be higher than an appraised value, resulting in more property taxes.
What Properties Qualify for Appraisal Caps?
This specific value cap applies exclusively to primary residence properties (homesteads) of up to 20 acres. Second homes and rental properties do not benefit from this tax limitation.
Starting in January 2024, non-homestead properties began receiving a new limit where their annual appraisal value increase is capped at 20%, according to the Texas Property Tax Code, Section 23.231. However, this only applies to non-homestead properties that have a market value of $5 million or less. This change aims to provide more tax predictability for owners of rental properties and second homes.
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. 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.
Home Improvements
Finally and most importantly, significant improvements count as exceptions to the home appraisal limit and can increase the value of your property. Improvements include, but are not limited to:
- Room additions
- Deck additions
- Improving curb appeal
- Remodeling
- Updating roofing
- New landscaping
- Adding energy efficiency improvements
- Swimming pool installation
Any improvement that adds value to your property increases its value and may be added to the appraised amount.
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.
What to Do if the Market Value is Lower than the Capped Value (and Vice Versa)
If your home’s market value is lower than its capped value, it means that the appraised value used for tax purposes is higher than what your property could be worth on the open market. In this case, you may want to protest your taxes for a chance to lower the market value, potentially saving you from significant tax increases in the coming years.
If the opposite is true and your home’s capped value is lower than its market value, you’ll likely benefit from the homestead cap.
Protesting Your Property Taxes
If you’re wondering how to lower your property taxes every year, protesting your taxes is a practical option. The Central Appraisal Districts (CADs) in Texas typically reassess properties and their market value annually to factor in neighborhood changes and home improvements, which can affect your market value and ultimately, what you pay in taxes.
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.