Home renovations can increase three things: your quality of life, your home’s resale value, and your Texas property taxes. While the first two are good, no one wants higher tax bills.
Improving your home doesn’t necessarily need to significantly cost you come tax season. By understanding the rules regarding home improvements and Texas property tax protests, you can ensure you keep your tax exposure to a minimum.
The Texas Tax Code requires all properties to be appraised for tax purposes at their market value. Market value is supposed to be determined by the price the home would sell for on the open market. Every local appraisal district must assess all the houses in their jurisdiction as of their market value on January 1 each year.
Because home renovations tend to increase the resale value of a home, they also increase its market value for tax purposes. When the county assessor becomes aware of your home renovations, they will calculate the value based on your old assessment plus the upgrades.
For example, imagine you added an addition to the back of your home that includes additional square footage, a new bedroom, and a half bath. If your home's previously assessed value was $250,000, with the addition, the latest market value might be $300,000.
Even if the renovations cost you less than $50,000, your tax-assessed value could increase by $50,000. For every one percent you pay in local property taxes, that's an additional $500 annually.
Often, home renovations require permits from your local city, and the tax assessor will review these permits to determine which homes were updated each year. Local appraisal districts may have other methods of unearthing unpermitted improvements within their tax district. You should be prepared for increased property tax bills if you undertake renovations.
If you qualify for and apply to receive a homestead exemption, Texas law does not allow your appraised home value to increase by more than 10% year-over-year. Even if real estate conditions indicate your home’s market value increased by 20% last year, the appraisal district is constrained by the law.
Additionally, senior citizens over 65 with a qualified homestead exemption are subject to a freeze on their local school district taxes. The amount you pay for school taxes will not increase beyond your bill from the year you turn 65.
These two legal provisions help control property tax costs for typical Texas homeowners. In particular, the tax savings from a senior freeze can help those with a fixed income afford to stay in their home.
However, home renovations are an exception to both the 10% cap and the senior freeze. But Texas law excludes routine home maintenance and repair from the definition of improvements or renovation. So, adding an addition or finished basement to your home count as renovations, but replacing an old roof is maintenance.
Understanding whether your home project will affect your taxes is critical. While increased taxes shouldn't discourage all home renovations, calculating raised tax ceilings into your budget will help make your improvements successful.
Texas tax assessors may take an opportunity presented by home renovations to significantly increase your home's appraisal. But often, the increase in your tax-assessed value does not match the market value increase from your improvements.
Consider if you installed an in-ground pool in your backyard. While this feature may have value to some buyers, it may discourage interest from other buyers (families with small children, people opposed to the maintenance, those who don't know how to swim, etc.). If the local appraisal district fails to factor in these conditions to your newly assessed value, your tax bills may be too high.
Luckily, Texas allows every property owner to protest their home's assessment. If you feel your home's new tax bills are too high following renovations, filing a protest can help you reduce what you owe.
A Texas property tax protest provides an opportunity for you to present evidence that your home's new valuation does not match its market value. During the process, you can informally discuss a reduction in the assessment and/or present evidence at a formal hearing. Either way, there are avenues for reducing your annual property tax bills, even after renovations.
Watchtower's experienced property tax protest team is ready to help you navigate the process. You can sign up for our risk-free services today using our convenient web portal.
Property tax in Montgomery County - a property tax consultant can help you manage your tax obligations, exemptions, deductions, and how to challenge your assessment.