Central Texas Duplex Owner Property Tax Resources

Provided as a courtesy of Castle Hill Investments

Thank you for visiting and welcome! We hope this page provides some assistance in the sometimes confusing and regularly shifting landscape of Texas property tax code.

UPDATE: Click here for a 5/20/07 article in the Austin American Statesman re: instructions on disputing taxes.

Note that we have tried to collect relevant information we've read and been sent by knowledgeable sources.

We hope that when you're ready to buy or sell a 2 to 4 unit investment (or owner occupied) property in Central Texas, you'll contact us first. No other firm represents more buyers and sellers and no other firm understands this niche market like we do.

We've broken down the page into the following sections - click on each section link for more detailed information.

Texas Property Taxes "At a Glance"

Taxes are not pegged to a buyer's purchase price

Property values are not required to be reported in the State of Texas and no governmental authority can legally require a buyer or seller to report a sales price.

Instead, taxes are determined by multiplying state and local level government tax rates by the appraised values, determined by an independent appraisal authority. The independent appraisal is generally close to market value, but often 10-20% less than actual market and on some occasions over market value. Any exemption applicable to the property owner is applied and the final resulting value is the property's tax value.

Taxes can go up or down every year

Each county in Texas funds its own Appraisal Office which is headed by a "Chief Appraiser". The Chief Appraiser is responsible for assessing the value of each parcel of land and each improvement (whether it be Commercial or Residential).

For years, property appraised values can go unchanged and in only one year increase or decrease depending on the market conditions in a particular neighborhood or submarket.

It is safe to say that the Appraisal Districts are generally fair, and though many homeowners dispute their property tax values (some do so annually!), 'Notices of Appraised Value' changes (received in April and May) are not generally a surprise to most people.

In addition to appraised values going up or down, tax rates may also shift. (See next bullet point, for example).

Tax reform passed by the Texas Legislature has offered relief in 2006 and 2007; however increased appraisal values have mitigated some of this relief

Legislation passed in 2006 effectively reduced property tax rates in many counties by as much as 20% (specifically, the maximum rate public school districts could charge was reduced over a two year period from $1.50 per $100 appraised value to $1.00).

Though as law abiding real estate brokers, we can't bug the offices of the Chief Appraisers, we suspect that discussions were undoubtedly held in which overall property values that many had felt were "under market", might have been adjusted to a more realistic market value the last couple of years. This of course would lessen the otherwise seismic deficit in school funding of what would be effectively a 33% reduction in the portion of school funding provided by property taxes.

However, we generally (though not always) find property values as appraised to be slightly less than market value. And if they're not, owners would be foolish not to protest.

Property owners have a right to dispute their appraised tax values, and often win

A point of civic pride akin to voting is the process of disputing a property tax evaluation. Up to 30% of citizens (in years in which the Chief Appraiser is feeling audacious) may dispute their notice of appraised value.

While the overall percentage of victorious disputes are not provided to our knowledge, we estimate that 50% or more of disputes result in some of relief, and staff of Castle Hill who have disputed their values have received reductions in appraisals of $250,000 (!) or more, resulting in a several thousand dollar per annum savings.

Whether you're a local owner occupant or an out of state investor, it behooves you to look closely at your 'Notice of Appraised Value' and determine whether it is in your best interest to dispute; at a minimum, it's an interesting few hour lesson in local civics.

Texas property taxes have a real and direct proportional effect on property values in the area

As technology and cheaper travel have increased in the U.S. and abroad, investment money from outside Texas (in the form of new residents moving here as well as distance-based investors) has flowed into the state at a remarkable pace, increasing property values at a rate that was not envisioned when the current property tax system was created.

We elaborate on the investment effects of Texas property taxes further down the page, but what we can say for sure is that Texas' high property tax burden exacts an invisible ceiling on property values that negatively affects all owners; most seriously senior citizens.

We're not here to stand on a soapbox, but we recommend that all property owners continue to make their voices heard to their congressmen and appraisal district authorities (via the dispute process of course, an angry phone calls is probably a waste of time, and not very nice).

Careful monitoring of appraised values is fundamental to overall investment property return

If you're a local Central Texas resident and you owner occupy your property, you probably have a pretty good handle on the value of your home, and will know if an appraised value comes in higher than it should.

If you're an investor who purchased the last few years, and you paid less than the appraised value, you'll likely get an immediate reduction if reported. And even if it has been several years since you purchased, there are local professionals that will dispute your taxes for you for a small cut of the savings.

The bottom line is - don't be quiet! See below for some tips and advise. But note that all property ownership is an investment, and careful monitoring of appraised values will help you get the most out of your investment by recurring annual savings on property taxes.

And remember, if your 'Notice of Appraised Value' comes in lower than you feel the property is worth, silence is golden!

How Texas Property Taxes Are Assessed

Sales Prices are "Confidential" - How We Got Here

As a vestige of Texas' frontier culture, a libertarian "government stay out of my business" ethos has prevailed when it comes to taxation in the State.

The state has never had a state income tax, and other taxes are light compared to other states.

As a result, Texas doesn't get the best grades when it comes to funding social services (like elder-care). The culture and politics of many Texans, however, shrug this ranking off and suggest that residents unencumbered by high taxes have more of an opportunity to "pull themselves up by the bootstraps" (which most in our company, for what it's worth, agree with, in general).

Texas has grown tremendously like states such as Florida and California and with this growth has come the need to fund an increasingly hungry public schooling system.

Not satisfied with unsatisfactory schools, the state began looking to property taxes to fund much of the school funding growth over the past several decades.

Surprisingly, despite these high property taxes, Texas has what many consider to be one of the lowest overall tax burdens for residents in the United States (though this is precious little benefit to investors from out of state who are subject to both their own state income taxes and Texas' high property taxes).

Though legislators in the Texas Legislature have authored bills that would make all real estate sales prices public data (thereby ensuring a more accurate valuation and accounting), it is thought that the current system is so entrenched and has benefited so many people for so long, that these bills have little chance of passing.

Appraisal Districts Are Defined for Each Community

Each County in Texas presides over its own "appraisal district". In Central Texas, the two primary areas are Travis County and Williamson county.

Within each appraisal district exists several taxing jurisdictions. A sampling of the jurisdictions are below (visit the county websites for more specific information on the jurisdictions):

• Public Schools - by far the largest taxing entities for property taxes; these often represent 40% or more of the property tax burden. Texas law limits public school taxes to 1% annually of the overall appraised property value.
• Community Colleges
• City Services
• County Services
• Utility Districts (sometimes called MUDs)
• Wastewater
• Imputed HOA's (instead of an annual HOA fee collected for services, the value is added to property tax rates - makes collection far easier ) It should be noted this is somewhat rare

By community or municipality decree, a percentage of the taxes are allowed by each taxing jurisdiction, and combined to create an aggregate property tax rate.

Rates are set by municipalities within guidelines established by the Legislature.

We've seen property tax rates as low as 1.7% in unincorporated areas with low infrastructure and service expenses, to as high as 2.9% in areas with higher infrastructure or community amenities.

The Chief Appraiser

Each county in Texas (253 of them) has its own Appraisal Department headed by a "Chief Appraiser" responsible for assigning market values for all properties with their jurisdiction. Laws passed by the Texas Legislature require that these districts appraise all property accurately, and as close as possible to actual market values. This can be tricky given the fact that sale prices are not publicly available and other than asking homeowners and home sellers what the price in the transaction was, they are left to more clever Sherlock Holmes techniques.

How The Appraisers Determine Value

Due to Texas' lack of mandatory disclosure of sale prices, appraisers must rely on publicly available data, and sometimes have access to MLS data. For properties at the lower price ranges with a lot of comparables, appraisals are often fairly accurated. For higher priced properties, or properties in areas without a lot of comparable sales, the appraised values may not track as closely.

Ultimately, the tax rates set by each county and municipality are multiplied by the appraised value and then any exemptions are applied. This is the amount each property owner must pay by January 31st of the following year, or be subject to serious penalties.

Let's use an example of a duplex located in North Austin that is valued at $180,000 by the Appraisal District.

We'll assume that in this are of town, there are four taxing jurisdictions - City of Austin School District (1% rate), Austin Community College (.2% rate), a MUD or municipal utility (.3% rate), and City Services (Fire, Police, Ambulance) at a .4% rate.

The total rate, therefore, would be 1 + .2 + .3 + .4 = 1.9%

$180,000 (appraised value) x 1.9% = $3,420 annual tax bill

If the duplex property is owner occupied, the owner enjoys a homestead exemption and a 20% discount, but only on their half of the property (see near the bottom of this page for an explanation of how owner occupancy can affect tax bills).

$180,000 x 1.9% = $3,420 (minus 20% reduction, but only on half of the building, so effectively this is a 10% reduction) - $342 = $3,078 annual tax bill

Exemptions

The most common type of exemption that may be applied to a property is called a "Homestead exemption", which in addition to providing legal protections for a homeowner, also allows a small discount to be applied to appraised (taxable) value, meaning that "owner occupants" have a slightly lower tax bill than do non owner occupants.

Owner occupants who have a homestead exemption are also offered protections against repossession and foreclosure in the event they declare bankruptcy. Though delinquent owner occupants can and are foreclosed on, as well as forcibly removed from their homes, many are able through payment plans and other bankruptcy procedures to remain in their homes.

Jeffrey Skilling of Enron fame made this concept famous when he plowed many of his ill-begotten proceeds into his Florida (a state that also offers a homestead exemption) home worth $5M+; claiming that the property could not be seized when his legal problems began.

Additional exemptions are provided to disabled veterans as well as Senior Citizens.

The Penalties for Not Paying

Counties in Texas are strict about property tax payment enforcement. Owners are given until January 31st of each year to pay their previous year's property taxes.

If payment is not received by January 31st, an automatic lien is placed by the county on the property for non-payment. Tax liens are big business and many investors watch these auctions closely.

Though payment plans (with interest) are available for some property owners, foreclosure is a real risk and happens all the time. Carefully monitoring of property values, therefore, is vital.

Some of our clients are unfortunately in a difficult position and have had or currently have difficulty paying their property taxes. Castle Hill Investments makes a point of humanely and professionally offering solutions to such owners, and have "bailed out" many owners who would have otherwise had their properties foreclosed on and lost forever. Call us if you would like a confidential consultation regarding such a situation.

The Annual Property Tax Calendar

In Texas, property taxes are paid only one time per year and are not adjusted at any time during the year (except in the case of a successful dispute).

Our California (and other out of state) investors are usually surprised to hear this, as they are billed more than once per year, and can sometimes receive a separate higher bill if the value is higher than the taxing authority believed earlier in the year (usually during a property sale).

January 31st

Taxes for previous calendar year due. Most mortgage companies with automatic escrows subscribe to data services that report taxes due, and therefore make property tax payments successfully without any intervention from property owners. However, we highly recommend that owners review each parcel on the county's "Tax Assessor Collector" website to ensure that the mortgage companies have indeed paid on time and correctly.

Property owners that do not escrow are responsible for paying their own taxes (and may do so in most counties with a credit card, albeit it with a service fee).

It is vital that property owners who do not escrow ensure that with each personal move that they do, that they notify the appraisal district of their new mailing address, else tax bills may go undelivered and unread, with disastrous consequences.

April 30th

"Notices of Appraised Value" sent to all property owners (sometimes the districts can take until June to finalize and mail all notices).

If you have not received a separate notice for each property you own by May 15th, we recommend checking with the Appraisal District for an explanation of the delay.

May 31st (or 30 days after 'Notice of Appraised Value' received)

All disputes must be filed with the county. No disputes will be reviewed or accepted after this deadline.

July 31st

Tax rolls are "certified" and all values are set in stone for the year. (sometimes an ongoing dispute may pass this deadline).

October

Tax bills for the year are mailed to homeowners, who then have until January 31st of the following year to pay them.

Disputing Your Tax Appraisal

Disputing your property tax appraisal is a matter of civic pride for many Texans, and although it can be an unexpected hassle for some owners, it is generally worth the time to consider a dispute, especially if your property saw a large spike in a given year.

Each county has slightly different rules and regulations for disputing, but most are fairly similar - in Travis County (most of Austin), it's as simple as turning the 'Notice of Appraised Value' over and writing your cause for dispute directly on the back of the form.

We keep copies of both the front and the back of the form, as well as any supporting documentation, in a separate file for each property. Good organization, as with most matters, will help you make a stronger case.

Buy in 2005 or 2006?

If you purchased in the last two years, and you paid less than the new 'Notice of Appraised Value' indicates, you're in luck!

Disputing is simply a matter of filling out the back side of the notice, indicate that you paid less, and photocopy your HUD-1 closing statement that you received at closing; send all documents back to the appraisal district, and you have almost a certain chance of an automatic reduction. (Castle Hill regularly provides copies of closing statements and other documents to our clients for this purpose.)

If you bought before 2005, it can be a bit trickier to dispute your taxes, and we recommend that you either call/email us if we were your representative, or, we can put you in touch with one of two firms that make a living out of disputing property taxes.

These two firms have made a great business out of working with homeowners to dispute their values, and provide an invaluable resources, particularly for out of state investors who don't always have the time or inclination to get involved in the process.

Another benefit to using these services is that they have information that no broker or homeowner could have access to - matrices of sale price data, and sometimes even comments from the appraisers themselves on internal data networks. Therefore, their insight can be vital to a successful dispute.

Property Taxes and Investors

Perhaps it's ironic that for every equity increase in value that Texas property owners enjoy, future appreciation of their properties slows down just a bit as well.

Why ironic? Because it's the high tax rates on property that provide an artificial ceiling on property values in the state.

Californians in the 70's passed "Prop 13", which permanently pegs a homeowner's property value to their purchase price (and 1% at that - rumor has it that Warren Buffett pays less in annual property taxes for his 60's purchased mansion than a first time homebuyer in Orange County pays today).

We know there are a lot of reasons California saw an incredible spike in property values the last five years (limited supply of land, tight development restrictions, a flood of capital from the stock market into real estate) - but we also know that the state's relatively low property taxes helped push the property values higher.

In Texas, there is a direct proportion of annual taxes due per $1,000 in valuation; so as property increases in value, the taxes go up in a straight line with the property.

Therefore, all other things being equal (which of course they're not), it is far more expensive to own a $250,000 investment property in Texas than it is in California. Of course you can't buy a cardboard box in California for $250,000 - which is why hundreds of millions of dollars have flooded into Central Texas (as well as billions elsewhere) the last few years as Californians and other West Coast investors have sought out better returns on their real estate purchases.

A Return to Normalcy

The impact to investors in both Texas and out of state as property values (and their associated property taxes) increase, is that fewer investors can "make the numbers work" for their investments. Increasing interest rates and tighter credit standards also influence buyer enthusiasm for investment property.

As the property market approaches an equilibrium state of its cash flows (compared with other markets, adjusting for anticipated equity and rental price appreciation), investment will level off and return to a more normal pace.

"Flippers" and others trying to make a fast buck in the market will realize that the going is rough, and find new markets to overheat.

The "buy and hold" investor that has represented property investment for hundreds of years becomes the norm, again, and investors actually have to wait the traditional 5 to 7 years in order to see reliable returns on their investments.

In Texas, and particularly in Austin right now, at the same time that we're witnessing a more normal return to investment activity (from investors out of state as well as locally), we're seeing a different force applying upward pressure on market values - job growth.

The Austin area enjoys one of the lowest rates of unemployment in the United States, as the area's excellent quality of life, climate, and high tech resurgence beckons young and old from all corners.

These folks need a place to live, and that is creating record low vacancies and significant equity appreciation, particularly in the areas people most want to live, which is in the Central Austin area and its surrounds.

Investors who invested in Central Austin a few years ago have seen excellent returns (some who leveraged have banked several hundred percent returns on their investments; while even those that paid cash saw 20% or more annually).

At first these returns were magnified by investors who came after them, and now they (continue) to be bolstered by upwardly mobile professionals, and already cash-rich West Coasters selling their property off and moving to Austin.

We're excited at Castle Hill and believe this trend will continue for at least the next eighteen months, and are uniquely positioned to recommend investments in the area that will benefit maximally from these market forces.

Senior Citizens - Caught in the Wake of A Booming Market

Many of the people that call our office are senior citizens caught in the wake of an improving market.

Many dutifully bought decades ago, and have paid their taxes, maintained their properties, and taken good care of their tenants. However, because neighboring properties have increased significantly in value from what they originally paid, they have a far greater tax burden. And because some aren't wealthy people, per se, with significant funds for improving the properties, the rents aren't going up sufficiently to cover the taxes, and they have to sell.

New Duplex Owner? What You Should Do Now

Ensuring Correct Mailing Address

It is vital that you as a property owner ensure that the local Texas county Appraisal District has your correct mailing address. If you're an investor, and the Appraisal District has a different mailing address (we very frequently see that the mailing address for an out of state investor is the actual property address); you will NOT receive tax bills, your 'Notice of Appraised Value', or other valuable information about your property.

Visit www.traviscad.org (for Travis County properties, including most of Austin) or www.wcad.org (for Williamson County properties, including all of Round Rock) - and type in your last name; make sure your correct mailing address is indicated.

The Phenomena of Two Parcel ID's

One of the most confusing situations with regards to the appraisal district and understanding taxes occurs when a duplex has been or currently is "owner occupied" (ie, the owner lives on one side and rents the other side to a tenant).

We're not exactly sure why, but we assume this is due to the fact that the appraisal district's computer systems aren't exactly cutting edge at this point, and the process of allocating the homestead exemption required a clever staff member in the county office to determine that one could actually split a single property into two parcel ID's, and apply the homestead exemption to one of them, but not the other one.

The downside to this tactic is that a property owner receives two bills! One for their homesteaded parcel ID, and another for the rental unit that is technically part of the same property.

Mortgage companies frequently don't understand this situation, and with our very own property, on several occasions, we've seen one of the bills get paid automatically through escrow by the mortgage company and the other parcel get ignored! We would not have noticed this and would have been subject to potentially large fines (and even foreclosure via a tax lien sale) had we not checked with the County Assessor Collector's office to ensure that all tax bills associated with our property had been paid in full.

Check to See if Your Property Has 2 Parcel ID's

Check with your buyer's agent (or the traviscad.org / wcad.org websites ) to see if the property is or ever was owner occupied and has more than one parcel ID. If you worked with an agent from a different company than Castle Hill, please note that many agent do not know or understand this concept, and you're better off checking it out on your own.

If it does, ensure that your mortgage company is aware of both parcel ID's, and check with both the mortgage company AND the assessor collector before January 31st of your first year of ownership to ensure both parcel ID's bills have been paid in full.

Write a letter to your Appraisal District and inform them that the property is no longer owner occupied, and the following tax year you will find that they have combined them back into one parcel, which should make everyone's life easier (although note that doing this will forgo any vestigial homestead or other exemptions the previous owner might have enjoyed that you were also benefiting from unbeknownst to the appraisal district).

Call Robert Grunnah at Castle Hill if you need an explanation (or assistance completing) any of this; he's discussed it with hundreds of duplex owners.

For Further Reading - Where Do We Go from Here?

Obviously, property taxes are a controversial issue.

Regional governments and school administrators are generally starved for income, so one can expect them to have less sympathy for property owners' tax burdens. Here's a website sponsored by the "Texas Association of Counties" that gives "talking points" to counties about property taxes, generally advocating for mandatory disclosure and other directives that may have a net effect of higher taxes:

http://www.county.org/taxcap/index.asp#localtaxes

Texas' Republican Governor, Rick Perry, advocates for lower taxes in all forms, and has an informative website about further property tax reduction:

http://www.governor.state.tx.us/priorities/tax_reform

For a more middle of the road article we read recently by the Texas A&M Real Estate Department, go here:

http://recenter.tamu.edu/tgrande/vol14-2/1808.html

Go to Castle Hill Investments home page.