Austin Texas Taxes To Be Aware Of – High Property Taxes

So, a lot of people get tripped up on property taxes when they move to Texas and when they move to Austin. So, in this blog post, I will explain the property taxes and walk you through what you should look for before buying a home in Austin.

A quick disclaimer: I am not a tax attorney, CPA, or financial advisor. I am sharing my knowledge and information about property taxes with you as I have experienced it as a homeowner and as a realtor in Austin. This isn’t legal advice, financial advice, or anything like that. Just do what you want with it, but you should not blame me for anything.

Let’s get right into it. If you have seen any of my other blog posts, you know I often talk about property taxes. It’s a big deal and something you need to account for when figuring out your budget, like your monthly budget and, therefore, the overall purchase price budget when considering buying a home in Austin.

There are a few ways to save on your property taxes when you buy a home in Austin as your primary residence. Unfortunately, if you’re buying a home as a vacation home, a second home, or an investment property, the homestead exemption is not going to apply to you.

So today, I’m talking specifically about what the homestead exemption does when buying a home in Austin.

Homestead Exemption

So, what is the homeowner’s exemption? There are two factors to it. One is well known, the other is confusing, and that’s the one that we’re really going to dive into today.

The easy thing is the homestead exemption will knock $40,000 off the assessed value of your home when you’re using it as a primary residence and you have filed for your homestead exemption.

The second part of the homestead exemption is where the actual savings come in. This is especially true as the market continues to increase, as we saw a couple of years ago. The second part of the homestead exemption says that the amount of the assessed value of your home cannot increase by more than 10% from year to year, which is incredible.

One year, they assess your home at a value of 600,000. With this 10% cap, your home’s assessed value cannot exceed 660 the following year. It can’t increase by more than 10%.

The kicker to this rule is that it doesn’t come into effect until the second year you own the home. And so what happens between when you buy the home and that second year is your property taxes will probably go up. With about 95% certainty, your property taxes will go up.

Here are a couple of ways why. So, the first scenario is the market increases. We will call the year you buy the home year zero because that doesn’t affect anything. The year you buy the home, you get to ride out the seller’s homestead exemptions, whatever kind of exemptions they had. Whatever the setup was that year for them, you get to ride that out. I’m sorry if they didn’t have any exemptions. You don’t get any.

Whatever the setup was for the year you bought it, you get to continue that through the end of the year. Let’s say you buy the house in 2020. That year is year zero. 2021 is the first full year that you own the house. We’re going to call that year one.

So, in 2021, year one, you file your homestead exemption. You file it right after you buy the house, and you get that homestead exemption for year one. Awesome. You don’t get the benefit of that 10% cap yet, though.

Between year zero and year one, if the market increases, if the market goes wild and the value of your home goes from 500,000 to 700,000, then 700,000 is the new taxable value of your home in year one, which becomes your new baseline.

Suppose you bought the home riding out the previous owner’s tax exemptions. In that case, whatever tax situations they had going on, the taxes that were on like the MLS when you bought it, like, oh, here’s the actual taxes that were charged for this house, maybe are probably going to be significantly lower than what your taxes are going to be in year one when you own the home. And for a couple of reasons.

One is because of the market value. So the house is just worth more because the market increased. Two, those sellers, if they’ve been in the house for at least a couple of years, have that 10% cap. So they’ve been benefitting from that 10% cap from year to year, which means their taxable value hasn’t been able to go up by more than 10% yearly. Let’s use me as an example. I’ve owned my home for 11 years and had the homestead exemption since the beginning, but I haven’t had that 10% cap credit until the second year I’ve owned the home.

From year two to year 11, I’ve had this 10% cap. So, my tax bill is $180,000 lower than it would’ve been if I didn’t have that 10% cap. That saves me a few hundred dollars a month because otherwise, they could tax me at the market rate. Instead, I have that 10% cap, so I reduce the taxable value of my home year over year, which adds up.

So if you’re buying a home from someone who has owned their home for several years and they’ve had the benefit of that 10% cap every year, that will add up after several years. So when you buy the home, the first year you buy it is year zero. The second year, your first full year is year one. In year one, your taxes will go up. I’m 95% sure your taxes will go up, one because of the market and two because you don’t get the benefit of that 10% cap yet. So they’re taxing you at the market value.

The good news is that in year two, they can’t increase the value by more than 10% of what it was in year one. The bad news is that it is at year one, which is your new baseline. So if you bought the house and the previous owners had a total tax bill of $12,000 a year, which is fantastic because they had that 10% cap every year, you don’t have that 10% cap yet because you just bought it, so that timeline resets. Now, your taxes are 18,000 a year.

They went from being like a thousand dollars a month to $1,500 a month. The good news is that they can’t increase by more than $150 a month after that. But the bad news is that now your baseline is $1,500 a month. It’s a total of $18,000.

Austin Tax Rate

One thing that we really need to keep in mind when you’re buying a home in Austin is having an idea of what the tax rate is going to be in the general area that you’re looking for.

Every neighborhood is different as far as the tax rate is concerned. The tax rate of one house may be different from that across the street. But in general, you know the average tax rate and what it would be in that area.

In Austin proper, the tax rate is very low because those homes are older. It has already gone through its growth. Its infrastructure is in place, things like that.

But in new construction areas, that tax rate is going to be higher. It will be closer to 2.7 to 3.2% versus 1.4 to 1.9% in the city.

Being aware of that and using just some basic math, it doesn’t even have to be complicated math. If your budget is 600,000, you’re looking at an area that has a tax rate of 2.7%. Your total tax bill will be about $16,000 a year for your taxes.

If you’re financing your purchase, your mortgage company will break up that $16,000 in monthly increments. So, plan on paying about $1,300 a month in taxes for a home that costs 600,000 at that 2.7% tax rate. That’s a real number. That’s something that you can actually expect to pay month to month for your taxes.

So, I really like to have people look at the total monthly payment they’re comfortable with and work backward from there. If we know that the monthly payment that we are comfortable with is $3500 to $4,000, that means including taxes in your principal and your interest, this is how much money we have to spend on the house.

And depending on what area we’re looking at, we can say, okay, for this price in this area, here are the features you’re going to get with that house – give or take. We’ll have a good general idea.

So if the location doesn’t work for you, if the features don’t work, or if the monthly payment doesn’t work, those are things that we need to tweak to get you to where you need to be. But it is important to consider the cost of the property taxes in your monthly payment and expect that they will increase.

Summary

So we talked about the benefit of owning a home: you’re locking in your payments, which is true for your principal and your interest. If you’ve got a fixed mortgage of 30 years, those payments will not increase. What is going to increase is your property taxes. Like, hands down, that’s going to happen.

You just need to have a good general idea of how much they’re going to increase. We can estimate that when we’re first buying a home. We can see, okay, this is what the tax rate is. This is what we’re buying the home for. Let’s do some quick math and figure out what the taxes will be when they jump back up to the regular rate, and then that will be your new baseline moving forward.

What we can’t predict is the market, so literally from one year to the next, prices went up by 20, 30, 40% in some areas. No one knew that that was going to happen. And so when that happens, your taxes will also go up. So we want to estimate them as much as possible, but again, no one has a crystal ball, and we can’t say what will happen to the market in the future.

These are some of the things that we will talk about on our call. So, if you’re thinking about moving to Austin and have questions about the taxes, the payments, what areas have higher tax rates, and why new construction is higher, reach out to me. I’ve got your back when you’re moving to Austin.