Attorney General Opinion & Request
Opinion Addresses Capped Values on Homesteads
On August 20, Texas Attorney General Greg Abbott ruled that enhancements that increase a homestead’s market value are new improvements for Tax Code Section 23.23 purposes and must be included in calculating that homestead’s capped appraised value.
Abbott also found that an appraiser must determine whether a homestead damaged by a natural disaster has been repaired or improved before the school district may increase the school tax ceiling provided by Tax Code Section 11.26(b) for qualified homeowners age 65 or older.
The attorney general’s office has received a September 11 opinion request on implementing new legislation that defines the term “temporary” for purposes of residential homestead occupancy to qualify for homestead exemptions.
In Opinion No. GA-0091, Abbott reviewed how to appraise repairs to a homestead with a limited (or capped) value provided by Tax Code Section 23.23 and/or a tax ceiling limitation provided by Tax Code Section 11.26. Harris County Attorney Mike Stafford’s request was on behalf of the Harris County Appraisal District (CAD). In June 2001, the Harris CAD had approximately 40,000 homes damaged as a result of Tropical Storm Allison, with many of the same homes flooded again in 2002.
Section 23.23(a) limits a residence homestead's appraised value for a tax year to not exceed the lesser of (1) the property’s market value or (2) the sum of:
(A) 10 percent of the property’s appraised value for the last year in which the property was appraised for taxation times the number of years since the property was last appraised;
(B) the property’s appraised value for the last year in which the property was appraised; and
(C) the market value of all new improvements to the property.
Section 23.23(e) defines "new improvement" to a residence homestead as one that is made after the property’s appraisal for the preceding year and that increases the property’s market value. The term does not include ordinary maintenance of an existing structure or the grounds or another feature of the property.
A new subsection (f) to Section 23.23, added by the Texas Legislature in 2003, does not apply to homesteads repaired or reconstructed by January 1, 2003. New Section 23.23(f) excludes from new improvements "a replacement structure for a structure that was rendered uninhabitable or unusable by a casualty or by mold or water damage.” This new exclusion applies to property appraisals for tax years beginning on or after January 1, 2004, even if the casualty, mold or water damage occurred before that date. This law change does not apply to this opinion that addressed homes repaired or reconstructed in 2001 and/or 2002.
Section 11.26 limits the school taxes for a homeowner 65 years of age or older to the amount the school district imposed in the first tax year in which the individual qualified for the over-65 exemption. Improvements to the qualified residence homestead, "other than improvements required to comply with governmental requirements or repairs," permit the school district to increase the amount to reflect the improvements' value.
The attorney general reviewed four scenarios for which the CAD asked how to apply either Section 23.23 or Section 11.26. They included a home suffering $15,000 in damage but not repaired by the following January 1 appraisal; a home completely destroyed but not replaced by the following January 1 appraisal; a home that fits one of the first two homes and also has a Section 11.26 tax limitation; and a homestead repaired better than its pre-flood state.
Section 23.23 capped value. The opinion first reviewed Section 23.23, with the pivotal issue being whether to value recent reconstructive work on a homestead as a “new improvement,” that by definition "increases" the property's market value. It found that "ordinary maintenance" does not include “substantial repairs and reconstruction necessitated by an extraordinary event like a tropical storm or hurricane. Whether repairs necessitated by other causes, such as termite infestation, constitute ordinary maintenance is a question of fact that the opinion process cannot resolve.”
The opinion held: “For those improvements that increase a property's market value and that are not ordinary maintenance, we are compelled to read section 23.23(a)(2) to require the appraiser to include their value in the calculation of the residence homestead's appraised value.”
The opinion pointed out that the legislature has allowed a taxing unit to authorize the damaged property's reappraisal immediately following a natural disaster under Tax Code Section 23.02.
Section 11.26 limitation. Section 11.26 allows increasing a tax ceiling for improvements to the qualified residence homestead "other than improvements required to comply with governmental requirements or repairs." The opinion reviewed what constitutes “repair,” and that term does not include replacement. The opinion stated:
“In a particular case, an appraiser must determine in the first instance whether work done on a particular structure constitutes repair. In the two scenarios you have set out, one residence suffered $15,000 in damage, while the other was completely destroyed. In accordance with the definition of the term ‘repair,’ the latter cannot be repaired; it must be rebuilt, and the rebuilt structure is an improvement for purposes of section 11.26(b). According to section 11.26's plain language, the tax may be increased accordingly. ... On the other hand, whether the former residence can be repaired or must be reconstructed is a question that requires the weighing of facts, which is not a function of this office. ... Moreover, the statute does not suggest how an appraiser should determine whether a homestead was partially destroyed, and therefore may be repaired, or totally destroyed and may not be repaired. Because the value of the damage totaled less than half of the homestead's original value, an appraiser reasonably could find that the homestead was repaired, although the ultimate determination is for the appraiser. If an appraiser determines that a particular residence has indeed been repaired, section 11.26 of the Tax Code compels the conclusion that the homestead has not been improved, and the tax may not be increased. ...”
The opinion also looked at the situation in which a homeowner "bring[s] the property to a better than pre-flood state as worn or outdated components are replaced with new, up-to-date components" or makes significant other upgrades, above and beyond replacing old components with new, modern components. To provide only guidance in this regard, the opinion gave some examples. It said:
“Thus, although a dishwasher, for example, may be damaged beyond repair and require replacement, the residence homestead itself is repaired by installing a new dishwasher. ... On the other hand, building a new structure on an elevated foundation is not a repair because the structure is new .... Adding an extra bath or increasing the size of the home, which you list as examples of ‘significant other enhancements’ that a senior homestead owner may make in the course of restoring the residence, are not repairs under section 11.26. The term ‘repair’ does not include enhancements to a residence's value. Consequently, a school district may increase the tax proportional to the increase in value.”
Temporary absence from homestead
The Texas Attorney General also is reviewing House Bill (H.B.) 1223 and the term “temporary” for purposes of residential homestead occupancy and exemption qualification.
Assigned Opinion Request No. RQ-0104-GA, the request is from Representative Fred Hill, Chair of the Local Government Ways and Means Committee. He asks if the term “temporary” applies to granting exemptions for the tax year beginning on January 1, 2004, or may it apply to homestead exemptions existing on January 1, 2003.
H.B. 1223 limits the temporary absence from the homestead to two years to maintain property tax exemptions, unless the absence is a result of military service or residency in a facility providing services related to health, infirmity or aging.