How do I know if I am getting the benefit of the 10% appraisal cap on my homestead?

Appraisal caps are a mechanism the State Legislature put in place in order to slow the rate of taxes for residential homeowners. This cap applies to residential properties that have a homestead exemption in place. The following is meant help explain how the work and the benefits of having a homestead exemption on your principal place of residence.

Closely reviewing you Notice of Appraised value can help. There are three main numbers to review when reviewing an annual Notice of Appraised Value: market value, total appraised value and taxable value.

Market value is typically the value the home would sell for on January 1st of each year. Appraisal districts all across Texas a required to appraisal taxable property at its market value as of January 1st.

Appraised value is a basic math calculation and may be commonly referred to as the homestead cap value or assessed value.  Once an owner has established a homestead on their primary residence, the 10% appraisal cap takes effect the following tax year.  Hood CAD compares the current years’ market value with the previous years’ appraised value. If the current market value is greater than the previous years’ appraised value by more than 10%, then the appraisal district cannot increase the previous year appraised value by more than 10%.   In another scenario, if the current years’ market value doesn’t change over last years’ market value, or even decrease some compared to last years’ market value, the appraised value may still increase by 10% as long as the appraised value does not exceed the current years’ market value. For a visual representation, see the homestead cap example.

Taxable value is another math calculation used to determine the actual amount of taxes each property owner will be required to pay the local taxing units. Taxable value equals the appraised value minus any applicable exemption amounts.

The following is an example appraisal notice from 2023 with explanations of the three different values.

• Question: How does the appraisal cap work?
  • The homestead exemption provides a limitation on the increase of the “appraised value”. The benefit is the appraised value cannot increase by more than 10% over the previous years appraised value. Keep in mind that market value and appraised value usually start off being the same when you first apply, but over time, in an growing real estate market, the appraised value grows at a slower rate than market value. As long as the homestead exemption remains in place so will appraisal cap. Once you move and the exemption is stopped, the appraised value is reset to market value and cap goes away. When you move to another home, you will have to reestablish a new appraisal cap.
• Question: When does the appraisal cap take affect
  • Answer: The limitation takes effect to the homestead on January 1 of the tax year following the first full tax year the owner qualifies a property under Section 11.13 of the Tax Code.
• Question: Can the appraisal cap apply to other property I own?
  • Answer: The 10% appraisal cap can only be applied to your homestead/primary residence. However, other non-homesteaded properties (with a value under $5,000,000) may receive a 20% value cap.
• Question: Can I lose the benefit of the appraisal cap?
  • Answer: Yes, if you sell this home and move to another home.
• Question: What happens if I sell this home and purchase another home that will be my homestead?
  • Answer: You will loose the benefit of this appraisal cap and be required to reestablish a new appraisal cap on the next home you purchase, provided the new home qualifies a your new homestead. This rule applies to any place you move to in the state of Texas.

The following graph is an example of how a 10% homestead cap can save a homeowner tax dollars over time. Let’s say the market value of a home starts at $98,000 and rises in value over the next 9 years. Under this example and with an established 10% homestead cap, the appraised value which is used for calculating taxes, is only at $229,000 at the end of the 9 year period rather than the market value of $422,000. This example saves the homeowner from paying taxes on $193,000 in value.