Property taxes are are a part of home ownership and they fund the city, county, hospitals, and schools. Property taxes go directly to the taxing authorities via the mortgage’s escrow account held by the mortgage servicer.
In the event an escrow account doesn’t exist, they come from the homeowner. At the end of the home loan process the property taxes paid and credited at closing on the Closing Disclosure (CD). Property taxes are considered pre-paids in the mortgage closing costs.
Property Taxes
The amount of annual property taxes paid comes from multiplying the home’s assessed tax value by the tax rates. The local Central Appraisal District (CAD) determines a home’s assessed tax value via an annual assessment. An example of this calculation is using a home’s tax accessed value of $400,000 times the 2.5% tax rate equals a annual property tax bill of $10,000, or $833 taxes per month. This is the gross amount of taxes owed before a homestead exemption or the over 65 and/or disabled person exemption are applied to reduce the taxes paid.
Home Valuations
There are three different valuations of a home and each is independent of the other. First, is the market value. This is the amount of money that someone would actually pay for a home. Second is the home loan’s appraised value. This is what a mortgage appraiser values a home to be worth based on market comps. Market comps are generally similar homes for sale in the area. Lastly, the third valuation is the CAD’s tax value. This amount is what the county determines your property value to be for tax purposes.
Central Appraisal Districts (CAD)
A Central Appraisal District (CAD) is responsible for assessing the tax value of a home. During the first year or two of home ownership the tax value is generally comparable to the sales price of the home. It’s also worth noting that the CAD does not receive any information relating to the mortgage appraisal. Furthermore the appraiser doesn’t tax the CAD’s valuation in to consideration either.
Central Appraisal Districts determine tax values once a year. In Texas, the CADs assess tax values around March and allow homeowners to protest these tax valuations through April or May. Ideally, you want a low tax value to lower your tax obligation. The tax valuation doesn’t impact your market value or appraisal value.
CAD websites are helpful tools to research estimated property taxes. They also provide other helpful information about a home. CADs websites provide the county’s value assessment for a home. While this may not be indicative of the true market value of the home, it is what the basis for property tax calculations. See the “Helpful Links and Tax Calculator” section at the bottom of this page for the most common counties in the north Texas area.
Property Tax Calculations
To calculate the amount of property taxes on a home you’ll need to know thee pieces of information:
- The CAD’s assessed value of the home
- The tax rates
- Applicable exemptions
Property Tax Rates
In the north Texas area tax rates typically range from 2.1% to 2.8%. We typically use 2.3% to 2.5% for rough estimates. An example of a tax rate breakdown is:
- City = $.797
- School = $1.282
- County = $.253
- College = $.125
- Hospital = $.286
When added together these total $2.74 which means that for every $100 in home value a homeowner pays $2.74 in taxes (or $.0274 for every $1). Using these numbers someone that owns a home with the CAD assessed tax value of $400,000 will pay $10,960 in annual property taxes. ($300,000 x .0274)
Prorated Taxes When Buying or Selling
In Texas the property taxes are due at the end of the year and the taxing authorities will only accept payment from one entity. Therefore, when you sell or buy a home the property taxes will be prorated at closing so that each party pays their portion of the year’s taxes.
When a closing on a home when taxes are not due, the the seller will provide a prorated tax credit for the portion of the year they owned the home. For example, an August 15th closing will show seller paying a prorated tax credit to the buyer for taxes owed from January 1 through August 15th. The buyer will then be responsible for the full year’s tax payment when they come due.
In contrast, the seller will be required to pay the property taxes in full to the taxing authorities on the Closing Disclosure (CD) if taxes are due at the time of closing. In this case the buyer will provide a credit to the seller for their portion of prorated taxes. Example: if the closing date is December 12th the seller will pay the full tax bill and the buyers will prorate the sellers taxes from December 12th through December 31st.
Figures Used for Prorated Tax Amounts
In Texas, the exact amount of annual property taxes are unknown until property taxes come due in October. (Side note, the CAD does send an estimated tax bill to homeowners in March when they issue their notice of tax values). Therefore, when closing on a home before taxes are due, the prorated taxes at closing come from an estimated tax amount. Using the previous year’s taxes as a guide provides the estimated amount. However, if the tax bill is due (which only occurs for closings after October in Texas) the prorated tax amounts will then be accurate using current bill.
Reconciling Taxes Paid and Credited
When the prorated taxes at closing are based of an estimated tax amount, the buyer and sellers can require the other party to reconcile the difference. This occurs only once the actual tax amount is known at year-end. While certainly a good thought, the vast majority of the time neither party follows through with this. The dollar difference is typically a nominal amount and most folks don’t want to waste the time tracking down and hassling a stranger for a few bucks.
Lower Your Property Taxes… for free
There are three (free) ways you can lower your property tax obligations:- File for any applicable exemptions: homestead exemption or the over 65 and/or disabled person exemption
- Contest your property’s CAD tax value
- Lastly, vote in local elections to lower your tax rates
Protest CAD’s Taxable Value
Texas state law requires that appraisal districts appraise properties at their fair market values and that they send Notices of Appraised Values to the homeowners. These valuations typically arrive in the mailbox around March. A homeowner may contest the county’s assessed value if they believe it to be over the fair market value. Most CAD deadlines for protesting the the value starts May 1st and lasts until May 31st (or 30 days after the Notice of Appraised Value was mailed to you, whichever is later). Each county will have it’s specific guidelines for contesting the value; therefore, check with your taxing authority on how to contest this value.Buying a Home with Existing Tax Exemptions
A home purchased that has existing tax exemptions (like the over-65 and/or disabled person exemptions) may result in an substantially increase in property taxes for the new homeowner the year following the purchase. These exemptions allow for lower tax valuations for the current home (i.e. the sellers) and those tax exemptions may not continue down the road.
Existing Homestead Exemption
A home purchased with an existing homestead exemption will have that exemption for the remainder of the year. The new homeowner must file a homestead exemption after January 1st the following year for that exemption to continue.
Likewise, if the home purchased is not someone’s primary homestead (meaning the new homeowner doesn’t live in the home), the new owner is still the benefactor of this exemption through the end of the current year. That exemption will expire on January 1st of the following year and taxes increase without that exemption.
Buying A Home With An Existing Over 65 Exemption
The rules are rather different when the purchased home has an existing over-65 or disability exemption. The over-65 and disabled person can file for their exemption immediately upon closing and owning the home, rather than waiting for the following year. Whether an existing over-65 or disability exemption stays with the home for the remainder of the year depends on whether the seller transfers those exemptions to their new residence.
- If the over-65 or disabled person does not establish a homestead exemption on a different homestead the exemption stays in place for the entire year and the new homeowner is the benefactor.
- In most cases the contrary occurs and the exemption is removed after closing. The annual property taxes are then prorated using the seller’s exemption amounts for the portion of the year and and the applicable exemptions for the new homeowner. Note: if the buyer is over-65 and buying a home with the over-65 exemption then the perorations for the buyer and seller will be comparable.
How To Determine Property Taxes
The easiest way to determine the property taxes for a property is to visit the County Appraisal District websites. To find your county we suggest you Google “X County Appraisal District” where “X” is the name of your county.
Please call us if you have any questions about property taxes, escrows, or prepaids – we’re here to help.