According to law, any property's value must be appraised at current market value for tax purposes. The appraisal district compares your home to similar homes that have sold recently and determines your home’s value.
But if you live in a thriving neighborhood, your property's value may increase by 15-30% each year. This can lead to a proportionately sharp increase in your property tax bill year-on-year!
To prevent this, a 1997 legislation amended the Texas State Constitution to provide tax relief by adding a limitation to the appraised value. According to this, the appraised value will be the lesser of:
- the value of any improvements added since the last re-appraisal
The calculated value is often referred to as a capped appraisal value.
There is no such thing as "capped value on property taxes". The cap is on appraised value of a homestead, not property tax. Texas homestead cap limits annual property assessments to be the least of the fair market value OR 10% of the preceding year's appraised value + value of any improvements made since the last appraisal. Homestead cap is applicable only to the primary residence.
Capped appraisal values are only applicable to residential homesteads that claim the exemption. This is because the law aims to address the needs of homeowners by making the taxable value of their homes predictable. Rental property, business property, vacant land etc. are generally appraised at market value unless there is an applicable exception.
No. Capped values are removed after a property sells. The first year in which a new property owner qualifies for a homestead exemption becomes the base year to calculate the capped values. Therefore, the property will be appraised at market value for the year in which you first qualify the property as your homestead. The cap is applicable from the second year that you qualify for an exemption in your own name.
Any addition made to the property that adds value to it is called a new improvement. Additions such as decks, garages, swimming pools, or any other types of fixtures can be considered improvements.
Once a new construction is made, its added value gets attached to the land value, thereby increasing the property's overall value. Improvements enhance the property's market value, thereby increasing the property's appraisal value that is used to calculate property taxes.
Any new improvement's value gets added to the appraisal value from the succeeding year after which it is added. But, improvements made due to routine service and maintenance are not considered new improvements, in order to determine capped values.
New improvements since the last appraisal will not calculate towards the capped appraisal value. The cap is intended to assist homeowners with value increases to buildings that were already on the property previously. Once there are new improvements, taxes are due from the following year on the full amount of value new additions contribute to your home.
Yes. By law, the appraised value is to be the lesser of:
- the value of any improvements added since the last re-appraisal
Therefore, even if the market value is reduced, it must be reduced below the capped value before the appraised value will change. Otherwise, the appraised value will remain below market value. The market & appraised value will be equivalent only if the market value is lower than the potential capped value.
Yes, you should! Unless you protest and lower your market value, CADs will continue to maintain their inflated estimate of your property's market value. Though some people claim this may be a fruitless exercise, our experience has shown otherwise. If you protest to lower your market value this year, it starts lower next year!
Aren't CADs supposed to determine the market value as on Jan 1st, irrespective of what it was last year?
In theory, they should! But practical constraints tie up their hands! Texas's non-disclosure law prohibits CADs from obtaining sale prices, without which they can't meaningfully estimate market values for homes. CADs rely on Mass Appraisal Systems to appraise properties. But in the absence of proper inputs, mass appraisal results can be askew. Hence, the only real way for you to find out your market value is to protest!
Though it may not lower your property tax in years when market value is significantly higher than appraised value, it will begin to show results when the real estate price curve begins to flatten. Hence, consistently keeping your market value low will pay off in the long run.
I bought my house in April 2021 for 324k. I applied for homestead exemption in early 2022. I just received the property tax bill for 2022. It doesn't have the 10% cap. When will the cap be effective?
Your cap begins from Jan 1st 2023. Jan 1st 2022 will be the base year for your homestead cap. Let's say your appraised value on Jan 1st 2022 was 350k. Then, your capped appraisal value on Jan 1st 2023 will be lower of 385k or market value.
Until 2023, appraisal cap applied only to homestead properties. Beginning 2024, non-homestead properties, including rental homes, second or third houses, investment properties, commercial, industrial and mineral properties, are eligible for a 20% annual cap on their appraised values. Texas Proposition 4, the Property Tax Changes and State Education Funding Amendment authorized the state legislature to limit the annual appraisal increase on non-homestead real property. This amendment was put to vote on Nov. 7th, 2023 and 87% of voters voted for the amendment.
This constitutional amendment establishes a temporary limit on the maximum appraised value of real property other than a residence homestead in a tax year to be the lowest of the market value of the property or 120 percent, or a greater percentage, of the appraised value of the property for the preceding tax year. It is important to note that this limit applies to non-homestead real property valued at $5 million or less including commercial, rental, second home residential and mineral properties. This is a three-year temporary pilot program ending on Dec. 31, 2026, unless renewed by voters. i.e., this limit is applicable only to tax years 2024, 2025 and 2026.
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