You just got your property tax bill in the mail. As you rip open the envelope, you’re bracing for impact. Property values in your area have skyrocketed this past year. Your neighbor just sold their place for a cool 30% over what they paid five years ago.
“Here it comes,” you think. “Another tax hike.”
But when your scan the notice, you’re pleasantly surprised. Your property’s assessed value – the number used to calculate your tax bill – has only gone up 10% since last year. Even though actual property values rose much more in your rapidly gentrifying neighborhood, you seem to have caught a break.
What gives? Did the county appraiser’s office make a mistake? Or are you the lucky beneficiary of some little-known tax law?
Time to get to the bottom of this capped value on property taxes…
What is Capped Appraised Value?
In Texas, we have a law that limits how much the assessed value of certain properties can increase each year. This is known as a capped appraised value, or an appraisal cap.
Here’s how it works:
- For qualifying properties, the assessed value cannot increase by more than 10% over the previous year
- This applies even if actual market value rises by more than 10%
- Any new improvements are taxed at full market value
So if your home’s assessed value was $300,000 last year, under the cap it cannot go up by more than $30,000 (10%) this year. Even if comps in your neighborhood are now selling for $400,000.
(As a quick primer – assessed value is the number used to calculate your property taxes. Market value is what your property could actually sell for.)
The appraisal cap provides some cushion from rapidly rising property taxes in quickly appreciating real estate markets. Just like you experienced firsthand.
But don’t get too excited just yet…the cap comes with some crucial fine print.
Who Qualifies for the 10% Cap?
The appraisal cap in Texas only applies to homesteaded property – your primary residence where you claim a homestead exemption. Rental homes, second homes, commercial properties, and vacant land are generally assessed at full market rates each year.
So if you have an investment property on the side that is rapidly appreciating, don’t expect the same kind of tax relief.
How is the 10% Cap Calculated?
When determining your assessed value for tax purposes, county appraisal districts first look at what they estimate your property would currently sell for. This is the market value.
Then they compare that to 110% of your assessed value from the previous year. Whichever is lower becomes your new capped value.
Here’s an example:
- Last year your home’s assessed value was $300,000
- This year the county says market value is $400,000 (a 33% increase!)
- Take last year’s assessed value of $300k and multiply by 110% = $330,000
- The lower of market value ($400k) and the capped value ($330k) prevails
- So your new assessed value is $330k, despite much higher actual market value
Any new construction or improvements made to your property can increase your taxes further. Things like adding a swimming pool, garage, or guest house likely increased your home’s value substantially.
County appraisers tax these “new improvements” at full market rates – not the 10% capped value. So be prepared for higher taxes from significant upgrades to your property.
Generally routine maintenance and minor fixes are not considered new improvements and won’t trigger reappraisals. But check with your local CAD to see where they draw the line.
New Homebuyer Implications
Here’s an important point that the glossy real estate flyers probably forgot to mention. The appraisal cap benefit resets whenever a property sells to a new owner.
That means in the first year of homeownership, your assessed value will be identical to market value, no matter how hot the market is. No gradual phase-in for you!
And remember – local governments can raise tax rates even if assessed values don’t go up. So new buyers commonly face double whammy of full market value assessments plus rising millage rates.
Perhaps helpful to cushion the blow going forward. But no relief for that first painful tax bill!
Upsides of Capped Assessed Values
Okay, even with all the caveats, Texas’ 10% appraisal cap likely saved you some decent cash this year. Especially if you’ve owned your home for awhile and property values in your area really took off over the past 12 months.
What are some of the positives provided by the cap?
Temporary Tax Relief
The appraisal cap was implemented to give homeowners temporary relief in years when property values rise rapidly. Instead of a 30%+ tax hike in a single year, increases phase in over time.
Delayed Impact of Gentrification
In up-and-coming neighborhoods seeing displacement through gentrification, the 10% cap helps delay the inevitable tax squeeze on existing residents. Long time owners aren’t suddenly priced out in a single year.
Protection from Housing Bubble
During property boom times – like Texas has experienced in recent years – appraisal caps prevent tax bills from reaching unjustified heights based purely on unsustainable market speculation.
So in several cases, capped assessed values serve their purpose in easing taxpayer pain points.
But the fact that relief is only temporary has led some experts to call for even tighter restrictions…
The Push for an Even Lower 5% Cap
Seeing rapid home price appreciation continuing to strain taxpayers, the Texas legislature recently considered an update to the law:
- Lower the appraisal cap from 10% annual increases down to just 5%
Proponents argued this would provide even more protection for homeowners struggling to keep up with rising tax burdens. Especially helpful for those on fixed retirement incomes.
And the proposal would have expanded eligibility beyond just homesteads to all types of real estate – including rental properties and commercial buildings. Thus aimed at broader relief.
But ultimately the attempt to enact a 5% cap across the board stalled out. And not everyone agreed it was the right approach in the first place…
Drawbacks and Unintended Consequences
While appraisal caps provide immediate gratification in restraining rapidly rising taxes, researchers have documented a number of problematic side effects stemming from tighter caps.
Inequities Between Taxpayers
Tighter caps exacerbate disparities in the taxes paid by new purchasers compared to those who have owned homes longer. New buyers pay taxes on nearly 100% of a home’s market value, while their nextdoor neighbor who has been there for years taxes a much lower capped value.
Upward Pressure on Home Prices
By incentivizing homeowners to remain in place longer to keep lower taxable values, appraisal caps restrict housing supply and mobility. With less turnover, home prices often rise even faster – hurting new buyers.
Shifting Burden Away from Wealthy Areas
Moreover, the benefits disproportionately flow to owners in higher-end neighborhoods seeing the largest home price gains. Working class areas with smaller value gains see minimal impact.
Higher Tax Rates
Local governments depend on property taxes to fund essential services and aren’t going to simply take the lost revenue sitting down. Many jurisdictions have increased tax rates to offset caps – wiping out any relief.
So in many cases, tighter appraisal caps have failed to deliver lasting equity or affordability improvements for homeowners overall.
Which leads to another big question…
Does Mud Tax in Texas Affect the Capped Value on Property Taxes?
Are There Better Alternatives for Property Tax Relief?
Rather than solely trying to restrain assessed value growth, what about directly limiting the tax burden instead? Here are some other approaches Texas legislators have debated:
Increasing Homestead Exemptions
This raises the minimum deduction all homesteaded property gets before even calculating a tax bill. For example, exempting the first $50,000 in value rather than just $40,000.
Pros: Simple, provides immediate tax reduction, benefits all homeowners evenly
Cons: Still leaves taxpayers vulnerable to rising overall rates, requires constitutional amendment
Property Tax Credits
Gives rebates or discounts directly applied to reduce total tax liability, regardless of home values or appraisals.
Pros: Easy to target relief demographically such as for seniors, not easily offset locally
Cons: Can become very expensive for state, benefits still tied to home values
Limiting Tax Levy Increases
Caps maximum property tax revenue jurisdictions can raise year-over-year, forcing efficiency improvements.
Pros: Restricts government dependence on property taxes over time, breaks recurring escalation
Cons: Politically difficult to enact, requires layered implementation
As you can see, none of the options on the table are silver bullets. And trying to provide broad relief through any one measure alone has risks.
The reality is some combination of approaches may emerge as the best path forward for sustainable, equitable tax changes in Texas’ red hot real estate markets.
Key Takeaways: Your Capped Value Need-to-Knows
Let’s recap what you really need to remember when it comes to Texas’ capped appraised value rules for property taxes:
- Only applies to homesteaded residences – not other properties
- Assessed value increases capped at 10% per year
- Benefit resets on sale, hurting new buyers
- Does not prevent tax rates from going up
- New construction taxed at full market value
While capped appraisal values offer temporary relief from rapidly rising assessed values, they should not replace the need to protest, vote wisely, and make your voice heard.
True protection will only come from comprehensive reform that promotes affordability, fairness, and sustainability in our property tax system.
But in the meantime, at least you can raise a toast to your state-mandated 10% cap the next time your pesky county appraiser insists your place is suddenly worth a fortune!