The Basics of Property Tax

By John Maguire

Property Taxes in Texas can often be between 2% and 3% of your property value every year - frustrating right? Here's a bit of information to help you weigh the pros and cons of the property tax system as well as some of the nuance. Hopefully with a little more information you will be able to understand how this system works, and maybe how to make it work a little better for you.

Property taxes have been a big part of Texas’ state revenue for a very long time. They’re one of the things that makes Texas so great, because they encourage residents to do something with their land, not just sit on it. Do you ever look around in Houston, Dallas, or Austin and think, “Man, they are always building here” or “Man, these people are attractive”? While the latter is a mystery, the former is all thanks to a tax structure that keeps money in the pockets of Doers and out of the pockets of... Land-Sitters?

The Property Tax system (to paraphrase Winston Churchill a bit) is the worst system in the world... except for all the others that have been tried. You should be proud of that system though, because it discourages Sitters from simply waiting years for land to appreciate. By learning a bit more about the intricacies of the tax system, you can better take advantage of its benefits and avoid some of its pitfalls.

Defining Our Terms

The first thing we need to define is taxing entities, sometimes called taxing jurisdictions. These public entities propose their tax levies on property owners, which the local government votes into place. The most typical entities are:

  • ISD (Independent School District) tax
  • hospital tax
  • community college tax
  • city tax
  • county tax

Usually in Texas you have five or six of these, or if you live in Harris County as many as 13. Each entity’s taxes make up a couple of percentage points that, when added up, equal your total property tax rate, typically around 2.5%. This is why you could have a $100,000 house that gets taxed around $2,500 a year.

The next thing you need to know is the difference between market value and assessed value. Some of you may see “appraised value” on your value notice instead of “assessed value.” That’s simply a useless distinction the appraisal district makes on words that are essentially synonymous. You’ll notice that I use “assessed value,” not appraised value. It’s a better term, so I'm going to use it.

“Appraised value” vs “assessed value” is a useless distinction the appraisal district makes on words that are essentially synonymous.

Basically we have three words that could mean the same thing: market, appraised, assessed. Before I define these terms, let me explain their relationship. All three terms are used to define two things: (1) What your appraisal district thinks your property is worth and (2) the value they are allowed to tax you on. If you have a commercial property, you don’t have to worry about what the difference is as they are the same. Now that you know the relationship, here’s the breakdown of the terms I promised.

  • Market Value – This always means what the appraisal district thinks you could sell your property for.
  • Appraised Value – This sometimes means the above and sometimes means the below.
  • Assessed Value – Finally a clear term! This is the amount you have to pay taxes on.

One easy way to remember it: whichever number is higher than the other is the value the appraisal district thinks you can sell your property for (market value). Whichever number is lower is the amount you’re paying taxes on (assessed value). If they are the same, then you are not capped by an exemption and don’t even have to worry about it.

Exemptions

When it comes to exemptions, if the appraisal district will allow you to claim it, you should take advantage of it. For our purposes, we’ll just focus on two of the most popular types: homestead exemptions and over-65 exemptions .

Homestead

So you want to be a homesteader – it used to be so much cooler. Roll into Wyoming, build a fence, die of cholera – those were the days! Now it just means you’ve filed for a homestead exemption because you live in a house. But unlike commercial or rental properties, living in a home brings some great tax savings, like up to 20% off your ISD taxes or even a flat tax deduction. The rules around this change regularly in each district, and there is almost no normalization, so it’s not worth getting into too much detail. The key takeaway is that a homestead exemption will definitely reduce your tax burden.

An additional benefit of a homestead exemption is that the appraisal district isn’t allowed to raise your taxable value more than 10% per year. So, in a given year, if your market value increases more than 10%, your assessed value gets capped at 10% higher than your assessed value was last year. Don't you wish you could cap all of your property tax increases? Me too, but unfortunately only one homestead exemption is allowed per person and it is supposed to be placed on your primary residence.

Over 65

If you can file an over-65 exemption, congratulations! First of all, you have more years of wisdom than the rest of us, and your ability to freeze your taxes means you’re probably making a killing in the bank. I envy you. By filing this exemption, your tax burdens will stay frozen in whichever taxing entities honor the over-65 exemption. Usually half of taxing entities will honor the freeze, the most important being your ISD tax. When you add up ISD taxes and your other freeze-honoring taxing entities, you’re looking at freezing about 2/3 of your taxes, which is great because taxes usually go one direction: up.


There is so much more to learn about property tax, but hopefully you have a better grasp of the basics. The Texas tax system is a little wonky, I get it. Though sometimes it seems unfair, it does help drive our state’s economy and offers a statistically much lower tax burden than other states. Texas actually offers the 5th lowest tax burden in the nation according to the Tax Foundation. Before complaining about your property tax, call your cousin in California.