God bless Texas. The Lone Star State has no state property tax or state income tax. Two very BIG reasons why investors and residents have always loved Texas.
With no state tax, the state comptroller’s office does not collect property tax or set tax rates. That’s up to local taxing units, which use tax revenue to provide local services including schools, streets and roads, police and fire protection and many others.1 In Texas there are over 3500 counties, cities and other taxing districts.2
According to the Real Estate Center at Texas A&M University, the definition of property tax is: “A compulsory monetary contribution imposed by governments to pay for governmental activities. A property tax is assessed according to the value of property a taxpayer owns. Because property taxes depend on value, they are called ad valorem, meaning “according to value.”3
The property tax process in Texas is broken up into four phases, with each phase just as important as the next: Appraisal, Equalization, Assessment and Collection.4 Understanding how to investigate, navigate, question and manage this process for multifamily investments can be a significant contributor or detractor to a portfolio’s bottom line. As they say, “The devil is in the details.”
Property values presumably reflect its owner’s wealth; therefore, market value demonstrates an owner’s ability to pay. Knowing property values should allow governments to make impartial, fair tax assessments to individual property owners.
Multifamily Valuation and Tax Rate
There are two primary components to property taxes: valuation and rate. Valuation is supposed to be clinical, formulaic and apolitical. Rates are entirely controlled by the people, and their surrogate political appointees. A quick review of basic algebra proves that even if one goes up, and the other goes down sufficiently, your total tax bill can be less.
In reality, what any property is actually worth is simply what someone will pay for it. Theoretically, as sales happen, the value of all property becomes clearer. This, of course, assumes prices are openly shared – a rarity in Texas. The Lone Star State is one of only 13 that do not require sale prices to be reported.5 What makes commercial-scale real estate especially interesting is that rates can sometimes be negotiable as well when significant investment is involved.
Every prudent multifamily property owner knows that reviewing, and periodically challenging your appraisal is just smart business. If you can successfully challenge the appraisal, and acquire a better rate via abatements and other strategies, you’ve cut a fat hog. Appraisal districts are more streamlined now. In the past, it was relatively simple to keep sale prices confidential. Without real data, the disconnect between market value and appraised value can easily become distorted. In today’s digital age, there is little that does not escape the transparency of the internet. Recorded loan documents are easily mined by data companies that then sell information services to everyone, including appraisal districts. Now, even our own government has figured out how to use FOIA (Freedom of Information Act) requests to obtain even more hard data. Every time Fannie or Freddie is involved in multi-family financing, which is often, the records of those transaction are now subject to disclosure.
All this means that the gap between actual and appraised value will continue to narrow. This translates to fewer tax cost advantages unless your management understands the intricacies of valuation and how to apply these to your advantage. When dealing with multi-million-dollar properties, this can quickly add up.
One might argue this will provide a windfall for taxing authorities, but even the taxing authorities recognize taxing someone out of business is neither desirable nor advantageous.
While appraisal districts will continue to seek the real value of property, officials elected by the people still get to determine what the final tax bill will really be.
When was the last time you took an in-depth look at your multi-family portfolio’s property tax picture? Do you continue to go year after year without challenging your portfolio’s property tax assessments?
Are you leaving money on the table?
The Better World Family of Companies: Better World Properties, Better World Holdings and Better World Consulting offer complete apartment life cycle solutions including apartment property management in Texas, multi-family financing solutions, deal generation, and apartment process improvement. All under one roof.
- For more on the history of Texas property taxes see https://comptroller.texas.gov/economy/fiscal-notes/2015/october/proptax.php
- State and Provincial Property Tax Policies and Administrative Practices (PTAPP): Compilation and Report 2010 by Alan S. Dornfest, AAS, Steve Van Sant, Rick Anderson, and Ronald Brown