Issue
Central Appraisal Districts are responsible for determining and applying the taxable value for all properties in their respective counties, but because Texas has a variety of property types, we don’t have a one-size-fits-all appraisal approach.
For example, much of Texas’ land is used for agricultural purposes, and our state allows property owners to have their land appraised based on the land’s capacity to produce agricultural products rather than the land’s market value. This often provides a substantial reduction in the appraised value that is used for ad valorem taxation.
However, the Texas Tax Code allows that when land that has qualified for agricultural appraisal changes use to nonagricultural purpose, the property owner who changes the use will owe a “rollback tax” for each of the previous three years when the land had the lower appraisal (with some exceptions). This “rollback” tax is the difference between the taxes paid on the land’s agricultural value and the taxes that would have been paid if the land had been taxed on its higher market value.
What does this mean for the real estate industry?
This circ*mstance results in unfair and unjustified ad valorem taxation on property owners.
A significant future tax burden can deter potential property owners from seeking to use their property as they see fit, which violates their private-property rights. When considering the burden of “rollback” tax liability, property owners may be hesitant to reclassify their property from agricultural to another use, which not only places a burden on the owners, but potentially limits community growth.
Texas REALTORS® position
Our association supports repealing or reducing the three-year “rollback” tax collection and any related interest charges imposed when land that has qualified for agricultural appraisal changes use to non-agricultural purpose.
Legislative outlook
We expect to see legislation addressing this issue as the Texas Legislature continues to focus on reducing property tax burdens statewide.
Historical perspective
Texas has two constitutional provisions that value qualified property based on its agricultural use rather than on its market value.
Voters first added agricultural valuation to the Texas Constitution in 1966 as Article VIII, Section 1-d. Property qualified if it was used for agricultural purposes and was owned by a family or individual whose primary occupation was farming or ranching. The primary purpose was to keep land in agricultural use and protect legacy farming. As Texas became increasingly urbanized and ownership shifted from the family farm to other ownership structures, this approach became increasingly ineffective.
In 1978, voters added Article VIII, Section 1-d-1 to the Constitution. This approach focuses entirely on the use of the land and does not consider ownership structure or occupation. This approach is now used for most agricultural valuation in Texas.
The two provisions contained a “rollback” penalty to discourage changes from agricultural use and prevent the holding of property in agricultural classifications simply to avoid paying taxes on market value. The deduction from market value for agricultural use property is estimated at more than $210 billion.
It now appears that the “rollback” penalty has served its purpose and has become counterproductive to development and a limitation preventing needed value additions to taxing unit tax bases.
A law passed in 2019 reduced change-of-use lookback taxes due when a property is changed from agricultural to nonagricultural use, reducing the lookback period from 5 years to 3 years and reducing the interest due from 7% to 5%.
FAQs
Texas is one of a few states with no transfer tax. So if you're buying or selling a home in Texas, you don't need to worry about this expense.
Who is responsible for paying rollback taxes in Texas? ›
If land receiving an agricultural appraisal changes to a non-agricultural use, the property owner who changes the use will owe a rollback tax. The rollback tax is due for each of the previous three years in which the land got the lower appraisal.
What is the ag use exemption in Texas? ›
What qualifies as ag exemption? To qualify, the land must have been used for agricultural purposes for at least 5 of the last 7 years, and it must be in ag use currently. Agricultural purposes include crop and livestock production, beekeeping and similar activities. Many counties have minimum acreage requirements.
Why are real estate taxes so high in Texas? ›
Limited State Income Tax and Reliance on Property Taxes:
Unlike other states that collect income taxes to fund public services and infrastructure, Texas relies heavily on property taxes as a primary source of revenue. The burden of funding essential services falls on homeowners, leading to higher property tax rates.
How much do real estate agents get taxed in Texas? ›
Commissions you're paid as a real estate agent are taxed like any self-employment income. You'll owe 15.3% self-employment tax plus your income tax rate, which is based on your tax bracket determined by how much you earn.
What taxes do you pay when you sell a house in Texas? ›
Transfer taxes: Texas has no transfer tax for real estate sales, so Texas home sellers get a pass on this common closing cost. Property taxes: Texas also has no state property tax. However local governments do collect property taxes, and the rate will vary based on your location.
Who pays Texas sales and use tax? ›
In Texas, sales tax is collected on the sale, lease, or rental of tangible goods and some services. The tax is collected by the seller and remitted to state and local tax authorities. The seller acts as a de facto tax collector.
What is a rollback in Texas? ›
An Ag Rollback Tax is an additional tax that is imposed when a property owner changes the use of a property from Agricultural to any other use – excluding building a house for a personal homestead.
Who pays transfer tax in Texas? ›
A tax that we don't pay. We're fortunate in Texas that we don't have to pay transfer taxes on real estate transactions. In fact, we're one of just 13 states that don't have this tax. For Texans, the prohibition on a transfer tax has been enshrined in our state constitution since 2016.
Do chickens count for ag exemption in Texas? ›
2. What qualifies as ag exemption in Texas? Land primarily used for agricultural purposes over at least five of the past seven years is eligible. This includes activities such as crop production, livestock rearing, poultry, cover crops, timber, beekeeping, etc.
Beekeeping is the easiest and least expensive way to keep or obtain an AG valuation for an experienced beekeeper. Honeybees do not require fences, livestock trailers, veterinarians, hay, and you are not tied to the land.
Can 1 acre be ag exempt in Texas? ›
These requirements vary by county. But you will usually need a minimum of 10-15 acres to be eligible for ag exemption. These rules could also vary based on the type of agriculture activity. For example, if you're a beekeeper, you'll need a minimum of approximately 5-10 acres to qualify.
At what age do you stop paying property taxes in Texas? ›
You may be aware that seniors can apply for an exemption from Texas property taxes. This is true: when you reach the age of 65, you can file an affidavit with the chief appraiser in your district to exempt yourself from the collection of taxes on your property.
What city has the highest property tax in Texas? ›
Fort Bend County: 2.23%
Finally, the county with the highest property tax in Texas is Fort Bend at an average rate of 2.23% — about double the national average. A lot of this comes from various special tax districts that impose specific levies.
How can I reduce my property taxes in Texas? ›
A property owner must apply for an exemption in most circ*mstances. Applications for property tax exemptions are filed with the appraisal district in the county in which the property is located. The general deadline for filing an exemption application is before May 1.
Do I have to pay taxes on gains from selling my house in Texas? ›
While Texas does not impose a state tax on capital gains, you still need to pay capital gains taxes at the federal level. This means that when selling land or property in Texas, you might be liable for federal capital gains taxes, although some exemptions and strategies exist to avoid or reduce capital gains tax.
Do I have to pay taxes on the sale of my home in Texas? ›
Although Texas does not impose a state-level capital gains tax, individuals are obligated to pay federal capital gains tax on earnings derived from the sale of assets.
Are transfer fees legal in Texas? ›
(a) Except as provided by this subchapter, a private transfer fee obligation created on or after the effective date of this subchapter is not binding or enforceable against a subsequent owner or subsequent purchaser of an interest in real property and is void.
How do I transfer ownership of a real estate in Texas? ›
Transfers of real property must be in writing and notarized. Deeds should be recorded in the county where the property is located. To ensure a legal change to the property title, you'll want the services of an attorney. A qualified attorney will prepare and file the real estate transfer deed.
