This year I’ve had a bunch of buyers moving to Texas from out of state. One question that gets asked all the time with these out-of-state buyers is, “What’s going on with your property taxes in Texas?”
Texas is one of seven states without a state income tax. (Alaska, Florida, Nevada, South Dakota, Washington, and Wyoming are the others.)
While that’s great for your paycheck, our state and local governments have to get money some way to operate, so they make up for the lack of a state income tax in the form of property taxes. We’re up there with New Hampshire as far as our high property tax rates. These taxes go to pay for schools, roads, police and fire departments, emergency response services, libraries, parks, and other services provided by the local government.
The good news is the sky isn’t falling in Texas. Our property values are still on the affordable side of the spectrum compared to the rest of the United States.
When we look at this affordability distribution score, the least affordable state is, no surprise, California at a score of 0.50 and Iowa and Indiana tie for the most affordable state at 1.17. Texas… well we’re at .82. We’re pretty close to the average for the U.S. which is .85.
As far as our cost of living, we’re below the national average. We rank #19 as the state with the lowest cost of living and we're 4.9. If we’re going to be below average on something, I’m fine with it being on this data point.
So back to these property taxes. First question, how are they determined?
It’s actually the local governments that set the property tax rates. This means there can be big changes in your taxes between cities, counties, and taxing districts. Let’s say you live in a brand new neighborhood on one side of town while your friend lives in an older neighborhood on a different side of town. You will likely have two completely different tax bills.
Your tax bill in Texas lines out what entities are taxing your property and their tax rate. Taxing entities could include the county, the city, the local school district, the local hospital, and the local community college.
The taxing entity takes your appraised property value and subtracts any exemptions you have, divides that result by 100 and multiplies it by the property tax rate to get your total amount of property taxes due.
What are these exemptions? Different exemptions offered are homestead, inherited residence, age 65 or older, disabled persons, veterans,
solar and wind-powered energy device, and charitable organizations and businesses.
The most common one we have in Texas is the homestead exemption. To qualify, all you have to do is have an ownership interest in the property, use the property as your principal residence, and have occupied the home as of January 1 of that year. This exemption offers you a $25,000 reduction on your valuation for your school district taxes. Other taxing units may offer additional benefits with a homestead exemption but those are on a case-by-case basis.
The over-65 or disabled persons exemption gives you an additional $10,000 reduction on your assessed value for school district taxes.
You can visit Comptroller.texas.gov for more details on all available exemptions.
Okay, so you have your taxing entities and your exemptions. So now it’s starting to make a little sense, right? Well, hold on there. I’m going to throw a wrench into the works.
We also have additional land use development taxes. Wait… What?
So, I’m going to get a little technical here. These are levies within defined geographic boundaries designed to raise capital so developers can finance the infrastructure needed to support new developments within those geographic boundaries. So basically, developers pass on the cost of creating new infrastructure for new communities to the homeowners in the form of a land use development tax known as a MUD or a PID.
A MUD is also known as a Municipal Utility District while a PID is known as a Public Improvement District. Some of their differences are in the entity that establishes the district and the entity regulating the district.
Per our property code, a seller must disclose if they’re in one of these districts, so you won’t come in unaware.
So, while no one really gets excited about paying taxes, when you look at the net difference between what you’d pay in an income tax in another state from what you’d pay in property taxes in Texas, a lot of people still come out ahead and save more money by moving to Texas.
Are you one of those folks? If you’re looking to buy real estate in Texas, let’s talk. I specialize in the DFW metroplex real estate market but have a database of great Realtors all over the state so you don’t have to go into this blind.
Contact me to get started on buying a home in Texas or you can go ahead and schedule time on my calendar, click here.
Jennifer Shannon is a Texas real estate agent and broker, licensed since 2006.