In Texas, where property taxes (known as ad valorem taxes) are notoriously high, homeowners often seek ways to manage their appraised property values. A common strategy employed by savvy investors and homeowners is choosing to purchase and renovate an older home rather than buying new construction or an existing, untouched resale. This approach can lead to significant savings on property taxes.
The Appraisal Discrepancy: Renovation vs. Resale
The Texas appraisal districts are tasked with assessing the fair market value of all taxable property. While they are required to use mass appraisal standards and techniques, the practical reality often creates a tax benefit for renovations:
- Resale Homes: When a home is bought and sold, the final sales price often becomes known to the appraisal district, despite Texas being a non-disclosure state where sales prices are not public record. If the appraisal district obtains this data (often through MLS data or voluntary disclosure cards sent to sellers), they tend to appraise the property close to its new sales price.
- New Construction: For a new home built from the ground up, the value is typically established when the owner discloses and certifies the total construction cost to the appraisal district. This certified cost often sets the initial high appraised value.
- Renovation Loophole: When a homeowner buys an older, lower-valued home and renovates it, the appraisal district is often slower to recognize the full value of the improvements. The property may start with a lower base valuation, and the subsequent appraisal increases on the renovation are sometimes lagged or undervalued compared to the actual investment.
This loophole leads many investors to buy older homes, strip them down to the studs and slab, and essentially build a brand-new house on the existing footprint to benefit from the lower initial tax assessment.
Sellers and the Non-Disclosure Rule
Texas’s status as a non-disclosure state means that governmental entities, including appraisal districts, cannot force sellers or buyers to disclose the final sale price of a property.
- Seller’s Disclosure Card: Appraisal districts have historically sent voluntary cards to sellers asking them to disclose the sale price. Sellers are strongly advised by real estate professionals not to fill out this card, as doing so gives the appraisal district the exact data needed to raise the property’s appraised value.
- Privacy Protection: The spirit of the non-disclosure law is to protect homeowner privacy and prevent the local tax office from automatically raising values based purely on the sale price, forcing them to rely on mass appraisal techniques and market data instead.