The 20% circuit breaker is a property tax limitation introduced by the Texas Legislature to provide relief for owners of non-homestead real properties. This measure caps the annual increase in a property’s assessed value, ensuring that taxes remain manageable even in rapidly appreciating markets.
For properties with a homestead exemption, there’s an even greater benefit: the 10% cap on annual assessed value increases. If you qualify for a homestead exemption, learn more about how the homestead exemption 10% cap protects your primary residence and lowers your property taxes [link to article].
Here’s how the circuit breaker works for non-homestead properties, along with an example to illustrate its impact.
Background on the 20% Circuit Breaker
The 20% circuit breaker was introduced as a pilot program for the 2024, 2025, and 2026 tax years, specifically targeting non-homestead real properties valued at $5 million or less. This initiative provides tax stability and predictability for property owners in rapidly growing markets across Texas.
Codified in the Texas Property Tax Code, this limitation applies automatically to qualifying properties, giving property owners a vital tool to prevent sudden and unaffordable tax hikes.
How the 20% Circuit Breaker Works
- Eligibility Criteria
- Property Type: Applies to non-homestead real properties, such as rental homes, commercial properties, and second homes, that do not qualify for a homestead exemption.
- Value Threshold: Properties with an appraised value of $5 million or less qualify. This threshold is adjusted annually based on the Consumer Price Index (CPI).
- Ownership Duration: Owners must have held the property for a full calendar year (January through December) to qualify.
- Calculation of the Limitation
The assessed value is limited to the lesser of:- The prior year’s appraised value, plus 20%, plus the market value of any new improvements.
- The current year’s market value.
Example
- Year 1 Assessed Value: $500,000.
- Year 2 Market Value: $650,000.
- Calculation with 20% Circuit Breaker:
- $500,000 (Year 1 Assessed Value) + 20% ($100,000) = $600,000.
- Since the capped value ($600,000) is less than the market value ($650,000), the assessed value for Year 2 would be $600,000.
This limitation prevents the assessed value from increasing to the full market value, saving the property owner from a significant tax hike.
- Automatic Application
The circuit breaker is applied automatically by appraisal districts to all qualifying properties. Property owners do not need to file an application.
Exceptions to the 20% Circuit Breaker
- New Improvements: Significant additions or upgrades, such as a new structure or major renovations, are added to the taxable value and are not subject to the 20% cap.
- Change in Ownership: When a property is sold, the assessed value resets to the current market value. The circuit breaker cap will apply only after the new owner has held the property for a full calendar year.
Benefits of the 20% Circuit Breaker
- Tax Stability: Limits sudden increases in property taxes, even in areas with rapidly rising property values.
- Predictability: Provides property owners with a clearer picture of annual tax obligations.
- Investment Encouragement: Helps mitigate tax-related risks, fostering confidence among property investors.
Duration of the Program
The 20% circuit breaker is currently authorized for the 2024, 2025, and 2026 tax years. Unless extended by the legislature, the program will expire on December 31, 2026.