by Chris Woolsey
Following the wave of appraisal letters that landed in property owners’ mailboxes this past month, most signaling a sharp hike in value, it’s no surprise that property taxes become a hot topic this time of year. Every school board, city council, and county commissioner’s court will be meeting this summer to determine a tax rate to apply against this valuation. These bodies will ultimately decide if your taxes increase, decrease, or stay the same. However, one large demographic typically overlooks the impact these property taxes have on their daily lives—renters.
Whether it’s an apartment, duplex, or single-family house, renting property comes with hidden costs that are folded into a single rate. Not only does rent cover the cost of the loan, insurance, and property use, but every renter in the state is also paying property taxes, whether they know it or not. As rent continues to climb for Texans every year, understanding how property taxes contribute to your monthly bill is critical.
Though it varies depending on your specific situation, homeowners with a traditional mortgage and escrow account for insurance and property taxes usually see around 20%-25% of their monthly expenses going towards property taxes. If you are renting, you will probably never see these statements from the property owner, but they see them each month and must base their rates off covering these expenses. Using the safest estimate for an example, if your rent is $1,800 each month, somewhere around $250-$350 of that rate is going towards property taxes.
Rental properties are also vulnerable to faster property tax hikes due to lacking a key qualifier—the homestead exemption. Homestead properties (a home which you own and designate as your primary residence) receive exemptions for a portion of the valuation on which they’re taxed, and also receive a 10% cap on the amount the taxable value can increase. So, for homeowners living on their homestead property, their taxable value can only increase 10% in a given year. This cap was designed by the state legislature to, in theory, protect homeowners from property tax increases greater than 10% in a given year. Rental properties however, can see an unlimited taxable value increase in a given year, creating the opportunity for the property tax a renter has to pass on through their monthly rent to increase more than 10% per year due to taxes alone—a truly alarming scenario that many tenants across the state may experience this year.
Back to our previous example—if your rent is $1,800 and around $300 of that bill already goes straight to property taxes, can your landlord afford to keep rent flat if their taxable value increases 50% or more, like thousands of rental properties are seeing across the state, and now the property tax each month is $450? You should expect your monthly rent bill to increase at least another $150 just to cover the cost of taxes.
Since renters never see the portion of their rent check going to property taxes, its easy to think “that doesn’t apply to me” and tune out to issues that impact property taxes like local elections and bonds. The truth is property taxes affect renters even more than homeowners who live on their homestead property, because they are not afforded the same exemption opportunities. Every time property taxes go up renters will see an increase in their rent, and oftentimes it will originate from a local issue or ballot measure that they thought wouldn’t affect them. No matter what political campaigns or elected officials may try to tell you—yes, property taxes impact renters.
Property taxes are creating a permanent renter class in Texas and making the goal of property ownership harder and harder to achieve. In fact, the very existence of property taxes eliminates the idea of property “ownership” in the state of Texas altogether—everyone is a tenant of the government as long as property taxes continue to exist. Without reform to the broken property tax system, Texas may soon see the same unsustainable cost of living that has driven hundreds of thousands out of California to the mythical “low tax” state of Texas.
Understanding property taxes should be a goal for every renter in Texas. Whether you are trying to save money to move from an apartment to a house or repair your credit to qualify for a mortgage, property taxes disproportionately hit renters harder. Besides artificially inflating the cost of living for everyone in Texas, renters must also live with the possibility of their tax bill skyrocketing from year to year without the homestead exemption shielding them.
Now that appraisals have been sent out, cities, counties, and schools will begin setting tax rates, and every elected official on these boards will have the numbers to know the exact rate to pass to ensure your taxes don’t go up. Appraisal value increases don’t automatically equate to tax increases, but without involvement from the public, many taxing entities across the state will make the easy choice to “keep the rate the same” which will raise taxes to cover their spending. Homeowners will tend to become involved in the process more, since the issue is right in front of their face. It requires an entire united community, both homeowners and renters, to impact the property tax discussion. Renters need to show up to the ballot box both in May and November, as well as to their city council, school board, and county commissioner meetings regularly and get involved in the local issues that affect property taxes in Texas.
Chris Woolsey is a commercial real estate advisor and property tax consultant with The Means Companies. He is currently serving his second term on Corsicana City Council. He can be reached for business inquiries at chris@rwmeans.com, or city inquiries at cwoolsey@corsicanatx.gov.
