Property Tax Myths
Property taxes can be fun! Maybe “fun” isn’t the right word, but an understanding of them can certainly save you lots of money – and that’s fun. Most people really don’t know too much about property taxes until it’s too late. I get countless calls from people who are shocked by their tax bill. There are lots of myths and misunderstandings about property taxes that can hinder your decision-making as a homeowner or real estate investor.
Property taxes can't increase more than 10%
This is one of the biggest misunderstandings out there. People call me all the time concerned about their taxes doubling or tripling when they buy a new house. This is all too common, mostly because of what I’d consider a poor practice in the real estate industry, splitting up property taxes between the buyer and the seller based on the previous year’s taxes. I hear it time and time again: “Last year, when I bought the property, the realtor said the taxes were going to be 5k a year, now they’re 12k!”
This could have been avoided if you had the right information to begin with. Those taxes were always going be 12k. The reason they were previously 5k is usually because you bought the property from someone with a massive exemption (like over-65, disability, etc.), but that exemption doesn’t transfer to you when the property changes hands. So, you’re stuck with the original 12k property tax.
Property taxes can't increase more than 10%(continued!)
Property taxes do in fact sometimes raise more than 10% in a year. Yes, there is a 10% cap on homesteaded properties and, yes, that will protect your taxable valuation from increasing more than 10% on your homesteaded property, but what if you just purchased the home? To meet the requirements for the homestead application, you have to have been in the property as of January 1st of that year (Texas Tax Code 11.42) and the exemption on file for the property must be in your name, not the previous owner's. That means that you’re not going to keep the valuation the owner before you had. Technically, the homestead cap will disappear before the new homestead exemption in your name is in effect.
Yes, there is a 10% cap on homesteaded properties and, yes, that will protect your taxable valuation from increasing more than 10% on your homesteaded property, but what if you just purchased the home?
For example, say the previous owner’s property was valued at 100k. You buy from him for 150k. Well, the county can’t raise the taxable value more than 10%, right? So you should be valued at 110k, right? Wrong. That cap is going bye-bye, and your value will most likely be raised to something more inline with your purchase price based on the appraisal district’s model and the other sales in your neighborhood. You might get lucky if the district’s not revaluing that area of the county that year. But if they are revaluing it, and the sales are in the 150k’s in that neighborhood, that’s most likely where your value is going to end up.
I'm capped, so I can remodel and it won't affect my taxes
This is an unusual scenario, but it comes up more than you’d think. Say you have a homesteaded property, and the taxable value gets raised 20%. What happened? “This can’t be right,” you say! Well, there really is only one situation that it would be right: your property was remodeled. (If this isn’t your situation, you should fight the district tooth and nail). The appraisal district will increase the contributory value (the market value of all new improvements to the property) of your property if it’s remodeled. The Texas Tax Code's calculation for this is stated in Section 23.23. It can be summarized as 10% of the preceding year's taxable value + the total taxable value from the preceding year + the market value of all new improvements to the property.
Let’s say your property is valued at 250k, which is fair, but then you spend 50k on a remodel. You get your valuation notice the next year and your market value and assessed value are 300k. You think, “What the heck? It shouldn’t have gone up more than 10%. My assessed value should be 275k!” Not if you’ve remodeled. If the appraisal district finds out about your remodel, they’re going to guess how much it increased the value of your home. After adding that amount to your original value, then the 10% kicks in. If your value was 250k, they might increase it to 300k, and your new capped amount would be 325k, if your market value was raised to the point that it would necessitate a cap.
The appraisal district isn’t supposed to appraise at full market value
This is a popular misconception. I’m not sure how it got around, maybe because properties have been so frequently under-appraised in the past. It may also stem from the fact that other states often tax based on a 'mill rate' (sometimes called a millage rate) which means that an amount per $1000 is used to calculate taxes on property. Regardless, the district definitely can and is supposed to appraise at full market value. The reason under-appraisal is so common is because the appraisal district usually has to have enough sales in order to represent the market adequately in the neighborhood. In order to do this, the appraisal district needs to go outside of the typical 3-month standard that most fee appraisers and real estate agents use. Since fee appraisers and real estate agents want the most accurate and current calculation of value for transaction purposes, using sales that occurred within the past 3 months of said date makes sense. Most appraisal districts will use the past 12-24 months of sales in order to value your property. And let’s remember, that the valuation date is as of January 1st, and you get your notice of value from the district in May(Texas Tax Code 23.01). So the sales they’re using could be from 18-30 months before the time you get your appraisal. A lot can happen to your valuation in 18-30 months.
Protesting my value hurts my resale
Boy, do I hear this one a lot, and I can see why people think that. The county appraisal value is the only thing that many homeowners see to know what their property might be worth, so they think, “Why would I want to decrease how much my home is worth?” People wrongly think that when a potential buyer looks at your property, the first thing they do is check the tax rolls. I don’t think this is the case, and even if they did, the most they will see is a fluctuation of data, just like what’s all over the market. Properties valued at 300k can sell for 350k. Properties valued at 500k can sell for 425k. Properties rarely sell for exactly what their tax value is. This can also be easily explained away to a buyer by telling them the value is so low because you protest. It will make them want to protest too.
People wrongly think that when a potential buyer looks at your property, the first thing they do is check the tax rolls.
Also, when your realtor prices out and lists your property, if they’re worth the money, they won’t even consider the tax value. The tax value is good for one thing and one thing only: figuring out how much you have to pay the government. At the end of the day, property is worth what a willing seller and a willing buyer agree upon. An arbitrary number for taxation shouldn’t influence that.
Protesting my value puts a target on me with the district
Honestly, they don’t have time to worry about you. Sorry ‘bout it!
I can only protest if my value increases from the previous year
This is simply not true. You can only protest your valuation once a year, but you can definitely do it every year, regardless of what happened the previous year. And a lot of time, there really is reason to protest even if the valuation doesn’t go up.
Think back to 2009. The market crumbled and a lot of people instantly lost 20 to 30% of the value of their property. In many counties they elected to roll over the values instead of reappraise. So while the county values didn't go up, there was definitely reason to protest because so many properties were way over-appraised after the crash.
Also, let’s not forget that a market protest is not the only type of protest there is. There’s also an “unequal” protest, meaning you’re not being fairly valued compared to your neighbors. Imagine that you didn’t protest one year and your neighbor did. If your valuation stays the same next year, odds are that their value is still low and yours is still high. Again, the value didn't change but there is still a perfectly valid reason to protest.
Okay, here comes the pitch, the reason we suggest property owners hire us in perpetuity: Imagine there’s a well in your backyard, and once a year there’s between $0 and $1,000 in it. Can you really tell me you wouldn’t check that well every year?
In practice, it’s a bit more complicated... The "well" isn’t in your backyard, it’s way across town and it takes a lot of time and effort to get the money out. But there's a company you can hire and they’ll do all the work and then send you 60% of what they pull out of the well. If they don't find anything then they did all that work for nothing, but you aren't out a dime!
If you haven’t caught on, the well is the pile of money you can save through protesting your taxes. You might as well protest every year – there’s no reason not to. You can either do it yourself or hire us.
Hopefully you have a better understanding of what’s true and what’s a myth about property taxes. Our goal at Resolute is to strive to bring this industry to the forefront, to help you gain knowledge of how to make property ownership a bit easier.
Knowledge is power, and in this case, the power to save a bunch of money.