Property Taxes in Texas

Property taxes are ad valorem taxes, meaning that they are levied as a percentage of value, regardless of the owner's personal income.  So, if you own a $200,000 house, you'll pay the same amount of property taxes whether you make $40,000 a year or $400,000 a year.

Generally speaking, you will receive a value notice regarding the assessed value of your house.  This value is determined by the county appraisal district.  The value, tax rates, owner's information and many other bits of data are all public knowledge and can be seen online on the web pages of the various appraisal districts.  Also, assessed value and market value should theoretically be the same, but frequently they are quite different.  Always utilize assessed (or appraised) value to calculate your tax liability.

If you disagree with the value of the assessment, you can present data to the appraisal district in support of changing the value.  They may agree to do so.  If they don't, you may protest the value with the Appraisal Review Board.  If they decline to lower the value, you may then pursue litigation.  (I should insert here that litigation may be very costly and you may end up spending $10,000 to save $1,000.  That's a large price to pay just to prove that you were "right.")

The tax revenues fund state and local governments, school districts, and public improvement programs.  The largest portion of the property tax revenue goes to the school districts.  Some of the taxing entities may grant exemptions on a small portion of the assessed value as well.  All of the information you need on the tax rates and exemptions can be found at your local appraisal district.

Here's an example:

Property Assessed Value:  $140,000

City Tax Rate:  .0012

County Hospital Rate:  .00153

County College Rate:  .002563

County Rate:  .001326

School District Rate:  .0147

Total Tax Rate: .021319

Tax Bill = .021319 * $140,000 = $2,984.66

 

Notice, that the taxing entities could all say that they are not raising tax rates for the coming year but that does not mean that your taxes will not go up.  If your assessment goes up to $150,000, your tax bill goes up accordingly.  ($150,000 * .021319 = $3,197.85)  So, don't assume that just because a county's tax rate doesn't go up it means that the county is actually working with a budget that is the same... if those assessments go up, so does the revenue. 

 

That works in reverse, too.  If the assessments go down, which is very common in our stressed economy, revenues will go down, absent a hike in the rate.

 

Leverage

BTIRR_E = BTIRR_P+ (BTIRR_P - BTIRR_D) * (D/E)

Easy enough?  Maybe.  Or does it bring back the sweaty palms and dry mouth reminiscent of high school algebra?  Don't worry, understanding this equation is not necessary for understanding the principle of leverage.

Current savings account rates are around 5% for larger balances.  That means that you'd earn $500 annually on a $10,000 balance.  But, what if you were able to borrow $8,000 of the $10,000 and only pay 3%, or about $240 a year in interest? 

That means you'd deposit the $8,000 from the loan and $2,000 of your own money to get you to the $10,000 balance, right?  You'd earn $500 a year, but you'd pay $240 in interest, leaving only $260 for your pocket.  But remember, you only put in $2,000 of your own money.  That means you actually earned a whopping 13%!  ($260 / $2,000) 

In other words, if you actually had $10,000 and you chose to only invest $2,000 and borrow the additional $8,000, you'd actually increase your return.  Eventually you'd probably say to yourself, "Self, why don't I use all of my $10,000?  I could borrow $40,000 and invest $2,000 in five separate accounts.  Then I'd make $1,300 ($260 * 5) on my $10,000."

That's leverage, plain and simple.

Something to keep in mind, the cost of the debt, or the interest rate, has to be less than the investment return.  Or, in this case, the loan has to have an interest rate of less than 5%.   Also, this benefit seldom applies to savings accounts and personal loans.  Typically, savings accounts earn less than the cost of such debt. Real estate, on the other hand is riskier and therefore should theoretically earn a higher rate of return.

And what about that equation above?  Well, that's just a fancy way of showing the benefits of leverage.  (BTIRR just means "Before Tax Internal Rate of Return")

BTIRR_E = BTIRR_P+ (BTIRR_P - BTIRR_D) * (D/E)

or,

Benefit of leverage = 5% + (5% - 3%) * ($8,000 / $2,000)

then,

Benefit of leverage = 5% + (2% * 4)

and, finally,

Benefit of leverage = 13%

Easy enough.