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Taxation of real property in Texas is controlled by provisions found in the Texas Constitution and the Texas Tax Code. Because taxes are based on the assessed value of the property, property taxes are commonly referred to as “ad valorem” taxes.
Each year on January 1st, a tax lien attaches to the property to secure all taxes, penalties and interest that becomes due on that particular piece of property. The lien automatically attaches if the taxes remain unpaid. This lien attaches to the property “by operation of law,” so no further action is required by the taxing authority to perfect the lien and there is no requirement that notice of the lien be filed in the real property records. Ad valorem tax liens remain in effect until the taxes are paid, until the lien is foreclosed by the taxing authority or until the passage of 20 years.
An ad valorem tax lien takes priority over all other liens or interests in the property, regardless of when the other liens or interests attached. Thus, it enjoys a “super priority” status. A tax lien takes priority over any mortgage lien on the property as well as any homeowner’s association dues.
An exemption removes part of the value of the property from taxation and thus lowers the taxes.
The most common exemptions are:
In order to qualify for a homestead exemption, the taxpayer must own the home on January 1st of the tax year. The property must also be used as the principal residence of the taxpayer. If the taxpayer temporarily moves away he can still receive an exemption as long as there is intent to return and another principal residence is not established. Temporary absence must be less than 2 years. Absence for military service or a stay in a medical facility may be longer with special exceptions. Note however, a person may not receive a homestead exemption for more than one residence homestead in the same year.
If a taxpayer is eligible for an Over 65 exemption or a Disabled exemption they can pay their taxes in installments without penalties instead of having to pay it all at one time.
The taxpayer may also “defer” or postpone tax payments, with the consent of their lender, by filing a “tax deferral affidavit.” This only defers the tax liability and interest continues to accrue. With a deferral the taxes are due in total 181 days after the death of the owner that qualified for the exemption.
These types of exemptions are transferable to another home. Note however, if the taxpayer claims another homestead during the year, the exemption is no longer allowed on the prior homestead for the remainder of the year and the taxing units will prorate the taxes based on the number of days elapsing after the taxpayer ceases to qualify to the end of the year.
An agricultural exemption lowers the taxable value of the land. There are a few types of agricultural exemptions and having the exemption means the tax office values land on its capacity to produce crops, livestock, qualified wildlife or timber, rather than its value on the real estate market. It is important to note that if the taxpayer changes the use of the land to a non-agricultural purpose, “rollback” tax could be owed for prior years. The county can go back and collect for the taxes starting at 3 years and up to 10 years depending on the type of exemption. The rollback tax is the difference between the taxes paid on the land’s agricultural value and the taxes that would have been paid if the land had been taxed on a higher market value for every year permitted under that type of exemption. In addition, interest can be charged for each year from the date on which the taxes would have been due.
As an example, pretend that a property has an agricultural exemption. The owner has been paying taxes in the amount of $100 per year due to the exemption. They are now selling their property. If or when the buyer changes the use the county looks at the tax records and decides that the taxes should have been $10,000 per year if the exemption had not been applied. Assume they have the  right to go back five years based on the type of exemption for that property. That means the county can issue a supplemental tax bill for $49,500 now ($9900 x 5 years) and the bill will be sent to the buyer. If this issue isn’t resolved at closing that buyer is going to be very surprised and likely unhappy.
When one seller qualifies for an exemption but their purchaser does not qualify for the same exemptions there can be issues in the closing. Often times the tax office will remove an exemption post closing. When the exemption is removed the county has the right to go back and true up the tax account. When they do this they issue what is called a supplemental tax bill. This supplemental tax bill is typically sent to the unsuspecting buyer who is now responsible for payment of the taxes. This tax bill is often several thousand dollars and comes as a shock to the buyer. Even worse, if the tax bill goes unpaid then the taxes become a lien on the property.
A realtor should watch each file for possible supplemental tax issues. Some red flags are:
1) Significant difference between assessed value and current sales price. This is an indication that the property may have been improved since the last tax office appraisal. Contact the parties and get instructions on how to prorate the taxes. The parties can instruct you to prorate on the assessed value, the sales price, or some other value.
2) Roll-back taxes
If the taxes currently have an agricultural valuation, the buyer and seller have to agree on how the rollback taxes are going to be handled. If the buyer’s lender requires tax coverage in their title policy, which is quite common, then the rollback taxes must be triggered and paid at closing. Since this can be a tax bill covering five years of taxes this bill can be significant and should be negotiated in the contract up front.
3) Tax Certificate Shows an “Over 65” Exemption
The appraisal district becomes aware that the taxpayer sold the home when the warranty deed is recorded. If the tax certificate shows an exemption for the last year, the buyer and seller have to agree on how to handle the tax prorations, meaning deciding if the taxes are going to prorated with the exemption (meaning the buyer gets a lower credit) or without the exemption (so the buyer’s credit is larger). This is something that has to be negotiated between the realtors and often is contentious since the parties have divergent interests.
Over 65 freezes the valuation of the school taxes. If a home owner has lived in a property with an over 65 for a significant amount of time, the actual taxes will be significantly lower because of the freeze. As an example, a seller might be paying $2,000 and the buyer could end up paying $10,000. Realtors should talk to the buyer and make sure their lender is escrowing properly so that the buyer is not surprised about their taxes post closing. A realtor representing a seller should also make sure their client knows how to transfer the exemption to a new home they are buying.
4) “Lost” Exemptions
If during any year prior to the current year the right to an exemption was “lost” because of a change in circumstances, the property is subject to a supplemental tax previously discussed. To make matters worse, most taxing authorities will not issue a supplemental tax bill, nor collect supplemental taxes, until after January 1 of the following year. Sometime after January 1 – when the appraisal authority has issued a new appraisal for prior years without the “lost” exemption – the taxing units will mail a bill for the supplemental taxes to the owner of record – your buyer.
If you believe there are changed circumstances that could result in a lost exemption, the issue should be raised and addressed prior to closing so that no parties are surprised post closing.
When you have an issue that could result in a post closing tax bill or proration issue it is important that you seek guidance from your trusted Texas National Title closing team. They can help walk you through the issues on your file and document that negotiations between the parties so that there are no surprises after closing.