By Roland Love, Vice President, Business Alliances & Field Operations
So maybe you’ve heard the buzz – “I can get a residential homestead exemption anytime during the year!” Is that a game-changer? Well, not unless you buy a property that does not already have the exemption, and then it can be meaningful. It also means one does not need to rush to close a purchase before January 1 to apply for the exemption.
What’s the big deal about January 1? Under the Texas Property Tax Code, a lien arises each January 1 to secure the payment of ad valorem taxes for the year. The process to determine the value of the property and the entitlement to any tax exemptions begins as of January 1. The appraisal district for your county spends the next 5-8 months building a tax roll. The taxing units are also creating budgets. Finally, the two are put together, and the tax collector generates a tax bill in the fall. Then the taxpayer gets to pay the tax bill for the current year on or before January 31 of the following year – very retro!
Over time, the Texas legislature has created several tax exemptions available mid-year. These include exemptions based on disability, military service, or survivors of first responders. Otherwise, the availability of an exemption is determined as of January 1, including the residential homestead exemption. This will change as of January 1, 2022. An important caveat, though – the improvement on the property must have still been capable of serving as a homestead as of January 1.
When is this change not a big deal? When the property already carries a residential homestead exemption. In this case, the residential homestead exemption has never been portable, nor is it lost mid-year, and it remains with the property until the following January 1. Effective this coming January 1, however, a residential homestead exemption may be applied for on or after January 2 by a Buyer (if the property being purchased does not already carry the exemption), and the Seller that buys another home may also apply for a new residential homestead exemption (if the property does not already carry a residential homestead exemption).
When is this change a big deal? Think about rental homes, second homes, investment property, estate sales, etc., that are being purchased as a primary home. The property obviously doesn’t carry a residential homestead tax exemption. But now, the Buyer can apply for and, if granted, receive the exemption mid-year. That’s a nice benefit. Moreover, the application will be good for the following year.
How is this handled at closing? Proration becomes a concern, but the exemption has not yet been granted. Thus, proration will proceed as before, and the TREC contract paragraph 13 provides for a reconciliation if a party desires. A closing before tax statements are available may result in the Buyer’s credit being too large. Again, if the property already carries a residential homestead exemption, this is a non-event.
This is a brief overview, for sure. If you would like a deep dive, take a look at SB 8 from the 2021 second special session. Or effective January 1, 2022, take a look at Texas Tax Code sections 11.42(f), 11.43(d), 23.23(c-1), and 26.1115. There will be lessons to be learned and likely unexpected consequences. For example, tax appraisal districts will need to learn to handle multiple residential homestead exemptions assigned to one person. In addition, questions addressing the same year’s change of the use of the property or resale by the Buyer will need to be sorted out. So, stay tuned – we will monitor and advise. In the meantime, good news for many of your Buyers!