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A Texas Property Tax Primer

The Texas real estate property tax system can be confusing and difficult to understand. What does the title company mean when they say things such as “Ad valorem taxes for the current year will be prorated”. If that sounds like Greek to you, you are not alone.

In this article we will try to cut through at least some of the confusion and the jargon. An ad valorem tax is simply a tax levied according to the value of the property being taxed. So, the ad valorem tax assessed against your home is based upon the value of the home. We’ll get to an explanation of prorations later. 

Most of the rest of the confusion around property taxes arises out of the process for determining the value of taxable property, then applying the tax rate established by the taxing authorities (cities, counties, school districts, and sometimes utility districts) to determine the actual amount you will pay in tax. Let’s break down the process into its components.  

January 1st is an important date in ad valorem taxation.

  • Tax Year. Taxes are assessed from January 1st to December 31st. and cannot be paid until tax statements are sent out at the end of the year. There are several reasons taxes cannot be paid until near the end of the year. The most important reason is that no one knows how much tax is due until the entire tax process is completed and tax statements are released, beginning in October
  • Property Configuration. Taxes are assessed against the configuration of property as of January 1st. For instance, if a seller owns ten acres and sells five to a buyer during the year, the tax statement at the end of that year will usually be for the entire ten-acre property. This “configuration rule” lacking a better description, affects any buyer who purchases property whose configuration changes after January 1st. For instance, a buyer and seller of a condominium created during the year may receive a tax statement for the entire property from which the condo was created. The county will not likely create a new tax account for each condo unit until the year following establishment of the condos. That means the owners will need to cooperate in paying their portion of the tax bill for the year the condos are created.
  • Property Values. Tax values are determined as of January 1st. For instance, if you are purchasing a new home only partially complete on January 1st, the taxes for the entire year will be based on the value of the property on January 1st. If construction on your new home was begun after January 1st, the property will be taxed as unimproved property for the entire year, even if construction of your home was completed during the year. 
  • Tax Exemptions. A tax exemption can help you pay less taxes on your home. There are tax exemptions for homestead, disabled veterans, seniors over the age of 65, people with qualifying disabilities, and some surviving spouses. An owner is eligible to request and be granted an exemption for the part of the year he or she owns the property. 

How property taxes are calculated. Determining the property taxes owed for each taxable property each year is a three-part process: First, the value of the property is determined; then the taxing entities decide on a budget for the following year; finally, the tax rate is set so the taxes will equal the budget. 

Let’s look at the three steps in more detail.

1. Determining Property Values.

Each appraisal district determines the value of all taxable property within the county as of January 1st. The appraisal district must send residential property owners a Notice of Appraised Value by April 1st or soon thereafter. Non-residential owners must be noticed by May 1st.

a. A property owner has until May 15th, or 30 days after receipt of the Notice of Appraised Value, whichever is later, to protest the proposed valuation. When a protest is received, the appraisal review board established by each appraisal district (ARB) will schedule a formal hearing.  Property owners can schedule an informal hearing with the appraisal district before the formal ARB hearing. A large majority of protests are resolved at informal hearings. 

Property Tax Exemptions. Property owners may qualify for various property tax exemptions for their primary residence which will reduce the taxes owed. The two most common exemptions are the Residential Homestead Exemption and the exemption for owners 65 years of age or older (Over 65 Exemption).

In additional to lowering taxes for the property, the market or taxable value of property with the Residential Homestead Exemption in place cannot increase by more than 10% each year. This is especially valuable when property values are increasing rapidly.  

The Over 65 Exemption further lowers the taxes for the property, but perhaps its most valuable attribute is that school taxes are frozen at the amount of taxes payable for the year the exemption is approved if the owner remains in the property. 

2. Adopting a Budget

After the appraisal district has determined the value of taxable properties, the process shifts to the taxing entities. The appraisal district determines property values.  The counties, cities and school districts use the values established by the appraisal districts to determine the taxes for each taxable property. 

During summer, the governmental entities adopt their budgets. All governmental entities have an established process for setting a budget. Much of the process happens behind closed doors, but around the end of summer, the governing councils or boards will publicly adopt a budget.

3. Setting the Tax Rate

As part of the budgetary process, a tax rate is set by the government council or board which, when applied to the established value of taxable property, will produce the income required by the budget. In October or November, tax statements are published and taxes for the year become payable. Property owners have until January 31st of the following year to pay the taxes before they become delinquent. 

Collecting Property Taxes. Each county elects a county tax assessor-collector to calculate taxes, using the values determined by the appraisal district and the tax rates set by the county, to calculate taxes, prepare a tax roll, and generate tax bills and collect the taxes. Other taxing entities within the county, such as cities, school districts, water districts, etc. often out-source assessing and collecting taxes to the county tax assessor-collector. In most counties, property owners receive one tax statement which contains the taxes assessed against the property by the taxing entities.