For Texas homeowners, understanding the distinction between assessed value and market value is crucial for managing property taxes effectively. These two values serve different purposes but play a significant role in determining your property tax liability. This article breaks down the differences, how each value is calculated, and why they matter for homeowners.
What Is Market Value?
Market value is the estimated amount your property would sell for on the open market as of January 1 each year. Appraisal districts calculate market value based on factors such as:
- Comparable Sales: Recent sales of similar properties in your area (often referred to as “comps”).
- Property Characteristics: Size, location, age, condition, and unique features of your home.
- Market Trends: Current real estate demand, supply, and economic conditions.
Key Characteristics of Market Value:
- Reflects the true selling price of your property under normal market conditions.
- Subject to fluctuations based on real estate market trends.
- Does not directly consider exemptions or caps on valuation increases.
What Is Assessed Value?
Assessed value is the value used by your local appraisal district to calculate property taxes. It is based on the market value but may be reduced by exemptions or caps, such as:
- Homestead Exemption: Reduces the taxable value of your primary residence by a specific dollar amount, such as $100,000 for school district taxes.
- 10% Cap on Annual Increases: Limits how much the assessed value can increase each year for homestead properties.
Key Characteristics of Assessed Value:
- Typically lower than market value due to exemptions and caps.
- Used as the taxable value to calculate your property tax bill.
- Does not reflect the full market value of your property.
How Assessed Value and Market Value Work Together
The assessed value starts with the market value as its base. Here’s how the process works:
- The appraisal district determines the property’s market value based on sales data and property characteristics.
- Any applicable exemptions or caps are subtracted from the market value to calculate the assessed value.
- The assessed value is then multiplied by the tax rate to calculate your property tax bill.
Example:
- Market Value: $600,000 (the estimated selling price of your home).
- Exemptions: $100,000 homestead exemption.
- 10% Cap: If last year’s assessed value was $400,000, this year’s assessed value can only increase by 10%, making it $440,000.
- Assessed Value: The lower of the capped value ($440,000) or market value minus exemptions ($500,000).
- Property Tax: If the local tax rate is 2.5%, your tax bill would be:
- $440,000 × 2.5% = $11,000.
Even though the market value is $600,000, the homestead exemption and 10% cap significantly reduce your tax liability.
Why the Difference Matters
Understanding the distinction between assessed value and market value helps you:
- Estimate Your Tax Liability: Knowing how exemptions and caps impact your assessed value can help you predict your property tax bill.
- Identify Overvaluations: If your market value or assessed value seems inflated, you can file a property tax protest.
- Protect Your Savings: For homestead properties, the 10% cap provides essential protection against steep increases in assessed value.
What About Non-Homestead Properties?
For non-homestead properties, the 20% circuit breaker limits annual increases in assessed value for properties valued at $5 million or less. Learn more about how the circuit breaker works and how it differs from the 10% homestead cap [link to article].