Property Tax Deferral In Texas
Did you know that some Texas homeowners can defer property tax payments? And for a long time, too. Over the next few minutes, I’ll explain who qualifies, how the deferral works, how to get it set up, when it ends & the taxes are due, how a mortgage impacts the deferral, and a few other important items. I’m Craig Smyser with 1835 Realty – let’s dive into this fairly unknown benefit. Also, in case you are wondering, property tax deferral is found in Texas Property Code Section 33.06. It’s a legitimate tax law and this isn’t some sort of sketchy workaround.
A big overarching component is this: Property tax deferral applies only to properties that are a “residence homestead” – which is your primary residence. This is not for second homes or investment property.
Now, there are three categories of people who qualify for tax deferrals. One, Someone who is 65 years old or older. Two, Someone who qualifies for a disabled veteran property tax exemption. Three, Someone with a disability who qualifies for a disabled property tax exemption.
All three of these groups already have existing property tax exemptions. While those exemptions are hopefully already in place, the tax deferral doesn’t require that the exemptions be applied to the property, simply that the owner qualifies for them.
So what does the tax deferral actually do and how does it work? For those who qualify, they can elect to defer the payment of property taxes. But it isn’t free. There is a 5% annual interest charge. Beyond the 5%, there are no penalties or other fees. This can be done year after year with the tax bill continuing to accrue. So when is the tax bill due? 181 days after the owner no longer qualifies for the deferral. In general, that means once the owner moves out of the house or passes away. If the owner moves out of the house because it is sold, the title company is going to collect and pay the taxes as part of the closing process.
How do the taxes accrue? Let’s say there’s a qualified owner who has a $5,000 property tax bill. For the first year, they owe $5,000 in tax plus $250 in interest, for a balance of $5,250. In year 2, for simplicity let’s say the tax bill again is $5,000 again. That brings the total to $10,250, that becomes the amount subject to the 5% interest charge. And it continues year after year until the owner no longer qualifies. Either they or their estate then pays the bill within 181 days.
A big thing to remember is that you must notify the county appraisal district that you are electing to use the deferral. Don’t just stop paying the taxes. To do this, you file form 50-126, which is the Tax Deferral Affidavit. You can find it on the Texas Comptroller website and likely on your county’s appraisal district website. I’ve also linked it in the comments. This form must be notarized before you submit it.
So why does this law exist? The concept was to help seniors, the disabled, and disabled vets continue to live in their homes even if the value of the homes rise to a point that residents have trouble paying the escalating tax bill. Many people who qualify live on fixed incomes so as their tax bill rises, they can’t afford to pay it. By having this option available, it permits some people to remain in their longtime homes because they don’t have to pay the taxes each year, but instead when they or their estate are finished. In almost all cases, the house is sold so the realized equity gain can pay the tax bill. Remember, the property tax is still due, it simply defers the due date until a later time. So what happens if the taxes aren’t paid at the 181 days? Well, the county will start the tax foreclosure process.
Another factor to throw into the mix is whether or not the qualified owner has a mortgage. If the property is owned free-and-clear, this isn’t an issue. But if the property has a mortgage, the law does not require the mortgage company to go along with the deferral. Let’s presume there is a mortgage with an escrow account. The owner can show the lender that they have set up the deferral, but it’s the lender who decides if they’re going to stop collecting from the owner and stop paying the property taxes. If you have a mortgage, but not an escrow account, you still need to have your lender on board. If they learn that your taxes are delinquent, they have the right to pay the tax bill and add the balance to your mortgage. In talking with a longtime employee of the Texas Comptroller’s office about this, he estimated, based on the calls he has fielded over many years, that maybe 40% of lenders will go along with the tax deferral. So it’s definitely a good idea to check with your lender before you set this up.
Whether this is a good strategy for any particular owner is for that owner to decide. While I gave the example of someone living in a house, but not able to afford the escalating taxes, there actually is no income component to the deferral. Even if you can easily afford to pay your taxes, you can defer. If you’re good with investing and think you can put the money to use working for you in a manner that gives you a return greater than the 5% interest charge, you could defer your taxes and make money on the spread.
For those who opt to defer the taxes, the public records will show that the property taxes are delinquent. That’s simply the legal classification since the taxes haven’t been paid and the taxing entities haven’t collected their money. Those entities will get their funds whenever the tax bill is ultimately paid.
Another item I want to mention is in reference to the disabled veteran qualification. The disabled veteran exemption has a variety of different thresholds based upon what level of disability the VA has rated. For the tax deferral, it does not matter what level of disability exists. So whether you are 10% or 100% disabled, you can defer your property taxes.
Finally, at any point, the owner can pay part or all of the tax bill. Just because the deferral exists, doesn’t mean it has to be used.
I think that about covers it. Again, it’s an interesting option available to those who qualify, but each person needs to make their own decision as to whether it is a good program for them personally. If you have any questions, leave a comment or reach out to me at 512-650-7300. I’m Craig Smyser with 1835 Realty. And remember, when you’re ready to buy or sell a home in Central Texas, I’m ready to help.