Under Texas law, prior to January 1, 2022, persons buying residence property had to wait until the year following acquisition to file for a homestead ad valorem property tax exemption. As of January 1, 2022, the property tax exemption can now be received during the year in which the property is acquired, immediately upon qualifying for the exemption. We have received several questions concerning how these changes to the Tax Code affect the application of the homestead exemption and the taxable value of the property and therefore thought it helpful to provide a brief summary of the changes.
Homeowners May Now Apply for and Receive the Homestead Property Tax as Soon as They Acquire and Occupy the Property.
The Texas Legislature, in the 87th Second Special Session, passed SB 8 which became effective January 1, 2022. The legislation adds Section 11.42(f) to the Tax Code and provides that, if a person acquires residential homestead property after January 1 of a tax year, the person may receive a residential homestead exemption found in Section 11.13 for the applicable portion of that tax year immediately upon qualifying for the exemption. Previously, the new owner had to wait until the next calendar year to take advantage of the homestead exemption (if the prior owner did not claim such homestead).
This new amendment does not apply to exemptions found in Section 11.13(c) and (d) of the Texas Tax Code, which are the over-65 exemption and a disabled persons exemption.
To qualify for the exemption under the new amendment, the owner must apply for it before the first anniversary of the date the property was acquired, pursuant to Tax Code Section 11.43(d). Under current law, a new owner who acquires property that is already subject to a homestead exemption for the current year continues to benefit from the exemption for the current year’s assessments irrespective of whether the property is new owner’s homestead. The new amendment does not change or address this aspect of current law.
The Ten Percent Annual Homestead Taxable Value Cap Will Continue to Take Effect for the Second Full Taxable Year After Qualification for the Homestead Property Tax Exemption.
Texas Tax Code Section 23.23 provides the taxable value of a property that qualifies for the residential homestead property tax exemption may only increase by a maximum of ten percent compared to the previous year’s taxable value. Section 23.23(c) provides that this cap takes effect on January 1 of the tax year following the first year the owner qualifies for the homestead property tax exemption.
The effect of Section 23.23(c) is that in the first taxable year after an owner acquires homestead property, the taxable value can increase more than ten percent and “catch up” to the market value of the property. In rapidly appreciating real estate markets, this practice prevents subsequent owners from taking advantage of a homestead property tax exemption claimed by a previous owner to start their ownership with a taxable value that is lesser than the market value of the property.
In order to maintain this structure under new Section 11.42(f), SB 8 also added Tax Code Sec. 23.23(c-1), which provides that for purposes of the homestead ten percent taxable value cap, the owner is considered to have qualified for the exemption as of January 1 of the tax year following the tax year in which the owner acquired the property.
Without new Sec. 23.23(c-1), property that qualified for the homestead property tax exemption mid-year would have been limited to no more than a ten percent increase in the taxable value for the first full taxable year after qualification. This could result in a property’s taxable value continuing to remain below the market value of the property after being acquired by a new owner, if the previous owner had qualified for the homestead property tax exemption on the property.
The result would be to deprive taxing authorities of significant revenue, as well as treating homeowners differently depending on whether they acquired a property that carried a previous homestead property tax exemption under the previous owner. Therefore, Section 23.23(c-1) was added to prevent such a scenario.
If you have further questions about the new provisions of the Tax Code as they relate to homestead property tax exemption or valuations, please reach out to Caroline or one of our other attorneys.
If you have questions regarding the contents of this alert, please let us know.
Allan Polunsky at Allan.Polunsky@mortgagelaw.com
Jay Beitel at Jay.Beitel@mortgagelaw.com
Marty Green at Marty.Green@mortgagelaw.com
Caroline Jones at Caroline.Jones@mortgagelaw.com
Lauren Polunsky Dreszer at Lauren.Polunsky@mortgagelaw.com
Peter Idziak at Peter.Idziak@mortgagelaw.com
Claire Barber at Claire.Barber@mortgagelaw.com
Andrew Duane at Andrew.Duane@mortgagelaw.com
Tye McWhorter at Tye.McWhorter@mortgagelaw.com
Cody Beitel at Cody.Beitel@mortgagelaw.com
Doug Foster1 at Doug.Foster@mortgagelaw.com
1Doug Foster is a non-lawyer and is not admitted to practice law in any state.