Ad Valorem Taxes & the Over- 65 Exemption Pro Rate ...€¦ · 2016 Texas Land Title Institute - Ad Valorem Taxes – Pro Rate, Transport or Rollback? Page 2 of 14 Ad Valorem Taxes

Ad Valorem Taxes & the Over-65 Exemption– Pro Rate, Transport or Rollback?

Texas Land Title Institute December 8, 2016

PRESENTED BY:

Lisa M. Beville

VP, Agency Support Services and Regional Education Coordinator Fidelity National Title Group Southwest Agency Division 8750 North Central Expressway, Suite 950 Dallas, Texas 75231 Email: [email protected]

mailto:[email protected]

LISA M. BEVILLE

FIDELITY NATIONAL TITLE GROUP Southwest Agency Group

8750 North Central Expressway, Suite 950 Dallas, Texas 75231

(214) 695-3345 [email protected]

Employment Experience:

4/11 to present VP/Agency Support Services & Regional Training Coordinator for the Fidelity National Title Group

2/09 to 4/11 Underwriting Counsel and Training Director for Old Republic

National Title Insurance Company 2007 to 2008 Southwest Agency Counsel for LandAmerica Southwest

Division Agency Department 2004 to 2007 Vice President and Assistant Regional Counsel for Chicago

Title, Ticor Title, and Security Union Title 1999 to 2003 Vice President and Underwriting Counsel for Alamo Title

Insurance/Fidelity National Title Insurance Company 1994 to 1999 Underwriting Counsel for Chicago Title, Ticor Title and

Security Union Title Insurance Companies

Education:

B.B.A. in Accounting & Finance from Texas Tech University J.D. from the University of Texas at Austin Memberships in Professional Societies and Associations: Member, State Bar of Texas Member, Dallas Bar Association Licensed as a Certified Public Accountant in the State of Texas Texas Land Title Association

Certified Title Insurance Professional

2012 Peggy Hayes Teaching Excellence Award

Individual Member

Training/Speaking Experience:

TLTA Land Title School and Texas Land Title Institute

TLTA, NMLTA and OLTA Seminars and Webinars

FNTG Agent Training Seminars in Texas, New Mexico and Oklahoma

2016 Texas Land Title Institute - Ad Valorem Taxes – Pro Rate, Transport or Rollback? Page 2 of 14

Ad Valorem Taxes & the Over-65 Exemption – Pro Rate, Transport or Rollback?

I. EXEMPTIONS

Every year, the Appraisal District determines the value of each piece of property located within the boundaries of that taxing unit as of January 1st. At the same time, each Taxing Unit sets a tax rate. The tax rate is applied to the property’s value to determine the amount of tax that is due. An exemption removes part of the value of property from taxation and thus lowers the taxes on that property.

A. Taxpayer responsibilities with regard to Exemptions

1. To receive an exemption, the taxpayer must apply to the appraisal district that

taxes the property.

2. If the taxpayer no longer qualifies for an exemption, the taxpayer must notify

the appraisal district in writing. If the tax district is not notified, and taxes are not paid in full (without the disallowed exemption) the taxpayer faces a 50% delinquent tax penalty, plus interest.

B. Residence Homestead – Section 11.13 of the Tax Code

1. General Criteria a) The taxpayer must own the home on January 1 of the tax year and use

the home as his/her principal residence at that time.

Renting part of the home or using part of it for a business does not disqualify the rest of the home for the exemption.

The homestead can be a separate structure, a condominium, or a mobile home located on leased land, as long as the taxpayer owns the home itself.

b) The homestead may be owned by an individual through an interest in a trust, as long as the residence is occupied by the trustor of the trust.

c) If the taxpayer temporarily moves away, he or she can still receive an exemption as long as there is intent to return and as long as the taxpayer does not establish a new principal residence.

Note: “Temporarily” means an absence of less than two years.

d) A person may not receive a homestead exemption for more than one residence homestead in the same year.

2. Types of Homestead Exemptions

a) School Taxes – All Homeowners – $25,000 exemption (increased from $15,000 by Constitutional Amendment on November 3, 2015.)


b) County Taxes – All Homeowners – $3,000 exemption for special taxes for farm-to-market roads or flood control, if collected in that county.

c) Optional Exemptions – All Homeowners – $5,000 minimum – May be offered by any taxing unit in addition to any other exemption.

d) Age 65 or Older Homeowners – $10,000 additional exemption for school taxes. An optional $3,000 may also be offered by any taxing unit.

The owner must be age 65 or older – and may apply immediately following the 65th birthday.

May be continued by a surviving spouse who is 55 years of age or older on the date the qualifying spouse died.

The owner – or surviving spouse – must also meet the General Criteria for homestead exemptions.

e) Homeowners with Disabilities – $10,000 additional exemption for school taxes. An optional $3,000 may be offered by any taxing unit.

NOTE: The various homestead exemptions simply remove a portion of the property’s value from taxation in order to lower taxes. The “homestead exemption” does not mean that the property is exempt from foreclosure in the event of delinquent taxes.

3. Additional benefits for “Over-65” taxpayers a) A person who turns 65 at any point during the tax year will qualify for the

over-65 exemption for the entire year. Thus, this person will benefit from this exemption retroactively for the entire year. To qualify for the exemption, the property owner must submit acceptable proof of age, which includes a copy of the front side of the property owner’s driver's license or a copy of their birth certificate.

b) If a property owner qualifies for the Over-65 Exemption, there is a property tax “ceiling” that automatically limits school taxes to the amount paid in the year that the owner qualified for the over-65 exemption.

A County, City or Junior College may also limit taxes for the over-65 Exemption if they adopt a tax ceiling.

Tax ceiling amounts can increase if improvements are added to the home (i.e., adding a garage, room or pool).

In addition, over-65 homeowners who purchase or move into a different home in Texas may also transfer the percentage of school taxes paid, based on the former home’s school tax ceiling. This is commonly referred to as a Ceiling Transfer.

c) Taxes may be paid in installments.

d) Homeowner may “defer” or postpone paying any property taxes by filing a “tax deferral affidavit.” This only defers the tax liability and interest continues to accrue.


II. Proration of Current Year’s Taxes

A. How Prorations Work

1. When a property is sold, taxes that are due or will become due on the property must be divided (“prorated”) between the buyer and the seller.

2. Normally, the buyer and seller have included provisions in their contract allocating responsibility for the payment of taxes between the pre-closing and post-closing periods. Therefore, sellers are usually liable for taxes on the property up to and including the date of closing, and buyers are usually liable for taxes on the property after closing.

Paragraph 13 of the current TREC One to Four Family Residential Contract (Resale) addresses tax prorations as follows:

Taxes for the current year, interest, maintenance fees, assessments, dues and rents will be prorated through the Closing Date. The tax proration may be calculated taking into consideration any change in exemptions that will affect the current year’s taxes. If taxes for the current year vary from the amount prorated at closing, the parties shall adjust the prorations when tax statements for the current year are available. If taxes are not paid at or prior to closing, Buyer shall pay taxes for the current year.

3. The seller doesn’t actually “pay” his portion of the taxes at closing; instead, on the settlement statement, his prorated portion of the taxes will be deducted from the sales proceeds he will receive, and a credit for these taxes will be given to the buyer.

4. If the tax bills have not yet been issued for the current year, the general rule is that the closer should use the actual valuation and tax rate that were used for the previous year in calculating the tax prorations.

5. However, if a house or other improvement was constructed during the past year, the escrow officer must obtain an updated valuation of the property since the prior year’s taxes would have been based on unimproved land.

6. Any tax exemptions that were applicable to the seller but are not available to the buyer should also be taken into account.

7. A tax proration agreement should be signed by the buyer and seller at closing. In this form, the source of the tax information used and any estimates used for prorations should be disclosed. In addition, this agreement should recognize the continuing liability of the parties for the payment of taxes on the subject property. (See Exhibit “A” for a Sample Tax Proration Agreement.)

B. Tax Certificate Shows “Over 65” Exemption

1. As noted above, when a homeowner turns 65, he or she may apply for an over-65 tax exemption. Once the exemption is in place, it remains until the taxpayer no longer owns the home or no longer occupies it as a principal residence.

2. How does the appraisal district know when a taxpayer sells the home? They see the Deed in the real property records. How do they know when a taxpayer moves? They don’t unless the taxpayer advises them. And what if the taxpayer


dies? They don’t know that either unless the heirs advise them. This is where potential tax claims issues begin.

3. If, according to the tax certificate or online appraisal district information, you see that the property was subject to an “over 65” exemption for last year, you must ask some questions in order to properly handle tax responsibilities – both with regard to taxes for prior years and for proper proration of taxes for the current year. (Caveat: See discussion of HB394 at Section IV below.)

a. Is the exemption still in place for the current year?

If the answer is – no – obtain the amount of the taxes without the exemption (most tax certificates and CAD web sites already provide this information) and proceed as usual.

If the answer is – yes – you have additional questions to ask in order to determine how to proceed.

b. How old is the current owner?

Owner is “over 65”

If you are handling a loan transaction – and the owner still resides in the house – that’s all you need to know. You can proceed without any special handling in regard to taxes.

If the owner no longer resides in the house – there is a potential problem because the exemption will have been “lost” when the owner moved. More information is required and will be discussed under the topic of “lost exemptions.”

If you are handling a sale transaction – more information is required and will be discussed under the topic of “lost exemptions.”

Owner is younger than 65

If the owner is not 65 (and is not the surviving spouse of the taxpayer who was over 65) – there is a potential problem. How did this person qualify for the exemption? The usual answer is that they did not – instead:

o They inherited the house from the qualifying taxpayer and failed to notify the tax office to delete the exemption.

o They recently purchased the home and the tax office has not yet picked up the new owners from the deed records.

o In any case – more information is required – and will be discussed under the topic of “lost exemptions.”

Seller is “over 65”

When an “over 65” taxpayer sells his home, the tax office leaves the exemption in place for the year of the sale, unless the taxpayer purchases another residence in Texas and applies to have the exemption on the new home.


Because of a change to the tax laws nearly a decade ago, a seller who is enjoying the benefits of an “over 65” exemption on his current home may take that exemption with him to a new home.

Here is the Texas Comptroller’s office explanation in the 2008 taxpayer rights and remedies publication:

If you do not claim another homestead in the same year, you will receive the aged 65 or older exemption for the full year. If you claim another homestead during the same year, you will no longer qualify for the exemption on the old home for the remaining portion of that year. Taxing units will prorate the taxes based on the number of days elapsing after you no longer qualify for the exemption, to the end of the year.

In practice, however, many tax appraisal districts and taxing units refuse to prorate taxes when an “over 65” seller claims an exemption on a new homestead. Instead, they remove the exemption from the previous residence for the entire year and apply it – for the entire year – to the new home. This inequitable process is the cause of many title insurance claims, escrow losses and very unhappy customers!

Basically, there are 3 ways that this transfer of the over-65 exemption issue may be addressed by the tax assessor. The assessor may:

o remove the over-65 exemption from the old property for the entire year and apply it to the new property for the entire year;

o leave the over-65 exemption on the old property for the portion of the year the over-65 taxpayer owned the property and then move the exemption to the new property for the remainder of the year; or

o leave the over 65 exemption on the old property for the entire year then start the over 65 exemption on the new property on January 1st of the following year.

Tax Code Section 26.10 (b) appears to contemplate the second option listed immediately above, as this provision provides as follows:

o Sec. 26.10. PRORATING TAXES--LOSS OF EXEMPTION. . . . (b) If the appraisal roll shows that a residence homestead exemption under Section 11.13(c) or (d), 11.132, or 11.133 applicable to a property on January 1 of a year terminated during the year and if the owner of the property qualifies a different property for one of those residence homestead exemptions during the same year, the tax due against the former residence homestead is calculated by:

o subtracting:

the amount of the taxes that otherwise would be imposed on the former residence homestead for the entire year had the owner qualified for the residence homestead exemption for the entire year; from

the amount of the taxes that otherwise would be imposed on the former residence homestead for the entire year had the


owner not qualified for the residence homestead exemption during the year;

multiplying the remainder determined under Subdivision (1) by a fraction, the denominator of which is 365 and the numerator of which is the number of days that elapsed after the date the exemption terminated; and

adding the product determined under Subdivision (2) and the amount described by Subdivision (1)(A).

It is the closer’s responsibility to know how the taxing units applicable to the property operate.

c. Does the seller plan on purchasing a new home in Texas?

Seller does not plan to purchase a new home in Texas Prorate taxes as usual using the “over 65” taxes. Advise buyer that taxes for the following year will be higher, as they

will be without the exemption.

Seller plans to purchase a new home in Texas Taxing units do prorate “over 65” exemptions:

o Prorate taxes as usual using the “over 65” taxes. Advise buyer that taxes for the year will be partially with and partially without the exemption, so higher than last year, and require the buyer to sign a hold harmless agreement that acknowledges that taxes will be higher. (See Sample Hold Harmless Agreement at Exhibit “B.”)

o Advise lender of your estimate of taxes for the year – partially with and partially without the exemption – and establish reserves according to the lender’s written instructions.

Taxing units do not prorate “over 65 exemptions”

o Prorate taxes without the “over 65” exemption. Advise seller that when he applies for an exemption on the new home, the exemption will be removed from the current home for the year.

o Advise lender that taxes for the current year will be without the exemption – and establish reserves according to the lender’s written instructions.

C. “Lost” exemptions

1. If during any year prior to the current year the right to an exemption was “lost” either because of the death of the qualifying taxpayer (without a spouse who is 55 or older) or because the qualifying taxpayer no longer occupied the home as a principal residence, the property is subject to a supplemental tax for the difference between the tax with the exemption and the tax without the exemption, plus a 50% penalty, and interest from the date when the tax was originally due and the date when the supplement is paid.

2. Section 11.43 of the Texas Property Tax Code provides that if a property was given a tax exemption erroneously or to which is was not entitled, the tax


authority can assess the property for additional taxes that would have been assessed had the property not had the exemption for up to five (5) years.

3. Here is the explanation given by the Texas Comptroller’s office in the 2008 Taxpayer’s Rights publication:

If you no longer qualify for the general, aged 65 or older or disabled homestead exemption, you should notify the appraisal district in writing.

If you fail to do so and don’t pay your taxes in full, you will face a 50 percent delinquent tax penalty, plus interest.

4. To complicate this already difficult issue, most (if not all) taxing units will not issue a supplemental tax bill, nor collect supplemental tax, until after January 1 of the following year. Sometime after January 1 – when the appraisal district has issued a new appraisal for prior years without the “lost” exemption – the taxing units will mail a bill for the supplemental taxes to the taxpayer of record – your buyer.

The results of this “supplemental tax” are automatically covered by title insurance policies – and there is no rule permitting the title company to remove this coverage. So, the title company must deal with this issue using guidelines similar to the following:

a. Contact Appraisal District Advise the Appraisal District of the circumstances which you believe result in a “lost” exemption. You must be the “whistle-blower” because of your responsibilities under the title policy.

b. Contact Taxing Units If they will accept payment – collect from the seller at closing and pay the

supplemental tax at funding.

If they will not accept payment, you must estimate and escrow in order to pay the supplemental taxes later.

(a) Estimate Amount of Supplemental Tax

If possible, get the appraisal district – or applicable taxing units – to estimate the amount that will be due, including penalty and interest. If they will not provide an estimate, get them to tell you how to estimate – and prepare the estimate yourself.

(b) Escrow for Future Payment

o Work with underwriting counsel to prepare an Escrow Agreement allowing you to escrow for payment of the supplemental taxes when the bill is issued.

o Collect the amount suggested by underwriting counsel from the seller (usually the estimate + a reasonable amount for possible underestimation).

(c) Follow up to assure that taxes are paid


o Advise the buyer to notify you when a Supplemental Bill is received.

o Follow up on this file beginning January 15 to make certain that the supplemental taxes are paid timely to avoid additional penalty or interest.

D. Additional Closing Considerations

1. Any additional taxes will be assessed against the property regardless of who is the owner.

2. Both the owner and loan policies insure against additional taxes due if exemptions were improperly granted in previous years and therefore our exposure is significant in this scenario. This coverage is different from the optional rollback coverage in the lender policy for additional taxes due to a change in use or ownership associated with land formerly having an agricultural or open space exemption.

3. With this in mind, the title company will review the file for “red flags” that could indicate that the property is receiving an exemption to which it is not entitled:

a. Seller on the contract is not the same person as on the tax certificate,

b. A relocation company selling with exemptions shown on the tax certificate;

c. Seller’s Disclosure Notice shows property is not owner occupied;

d. Solicitation Form shows seller did not claim this property as his primary residence;

e. Sale out of an estate or by heirs with exemptions shown on the tax certificate.

4. If the title company has information that indicates the property is receiving an exemption by error or for which it is not entitled, they will require the seller to advise the Central Appraisal District for the county where the property is located of that fact and obtain corrected tax statements before closing, where possible. Keep in mind that the appraisal district will remove exemptions for all years in which the exemption was not allowed. Therefore, the tax bill could be substantial.

III. Transport the Tax Ceiling

A. Tax Ceiling Defined

1. A tax ceiling is a limit on the amount of taxes a homeowner must pay on his/her residence. If the owner qualifies their home for an over 65 exemption for school taxes, the school taxes on that home can't increase as long as the owner owns and lives in that home. The tax ceiling is the amount the owner pay in the year they qualified for the over 65 exemption.

2. The school taxes on the home may go below the ceiling but not above the amount of the ceiling.

3. If the owner improves the home (other than normal repairs or maintenance), the tax ceiling may go higher for the new additions. For example, if a garage


or game room is added to the house, the tax ceiling will be adjusted to a higher level for the addition.

4. If the over 65 property owner moves to another home, a percentage of the school tax ceiling may be transferred.

5. The ceiling on the new home would be calculated to give the owner the same percentage of tax paid as the ceiling on the original home. For example, if the owner currently had a tax ceiling of $100, but would pay $400 without the ceiling, the percentage of tax paid is 25 percent. If they move to another home and the taxes on the new homestead would normally be $1,000 in the first year, the new tax ceiling would be $250, or 25 percent of $1,000.

6. To transfer the school tax ceiling, the owner may request a certificate from the chief appraiser in the last appraisal district in which they received the tax ceiling. The owner will present the transfer certificate to the chief appraiser in the district where the new home is located, when they apply for homestead exemptions on the new home.

B. Does Tax Ceiling Apply to County, City or Junior College District Property Taxes?

1. Yes, if the county commissioners court, city council or board of the junior college district authorizes a tax limitation on the homesteads of persons age 65 or older.

2. The taxing unit governing body or voters (by petition and election) may adopt the limitation. This local option does not apply to other special districts such as water, hospital, etc.

3. This “local option” tax ceiling can be transferred to a new home if the owner who is age 65 or older moves to another home located within the applicable taxing unit — city, county or junior college district.

4. The ceiling on the new home is calculated the same as the school district.

C. Tax Ceiling Issues

1. When the over 65 property owner moves to another home and transfers a percentage of their school tax ceiling to the new home, what happens to the school taxes on the “old” property from which the ceiling was transferred? Can the appraisal district say “the ceiling has been transferred, so now we can bump the school taxes up for the remainder of the year to what they would have been if the ceiling had not been on the property?

2. Apparently, some appraisal districts are taking this stance. Thus, when the over 65 seller sells the property to someone who doesn’t qualify for the over 65 exemption, the appraisal district is assessing school taxes on the property for the remainder of the year as if the property did not have a tax ceiling.

3. The research conducted to prepare this paper was not successful in finding anything about this issue. However, it is the closer’s responsibility to know how the taxing units applicable to the property operate when it comes to tax ceiling issues.


IV. HB394 Issues

A. Text of House Bill

1. HB 394 amended Section 25.027 to the Texas Tax Code. This amended statute reads as follows:

Sec. 25.027. RESTRICTION ON POSTING INFORMATION ON

INTERNET WEBSITE. (a) Information in appraisal records may not

be posted on the Internet if the information:

(1) is a photograph, sketch, or floor plan of an

improvement to real property that is designed primarily for use

as a human residence; or

(2) indicates the age of a property owner, including

information indicating that a property owner is 65 years of age

or older.

(b) Subsection (a)(1) does not apply to an aerial

photograph that depicts five or more separately owned buildings.

2. This amended statute became effective September 15, 2015.

3. Of particular interest for this discussion is provision (a)(2), which indicates that the age of a property owner cannot be posted on the tax appraiser’s website.

4. The title industry is now finding out that some Appraisal Districts are reading this provision to say that neither the tax certificate nor online appraisal district information can disclose that the property is subject to an over 65 exemption. For example, the Montgomery County Appraisal District website contained the following provision:

Q Why does the website no longer indicate I have an Over 65 exemption?

A

Notice: House Bill 394 H.B. 394 amends the Tax Code to include information that indicates the age of a property owner, including information indicating that a property owner is 65 years of age or older, among the information in property tax appraisal records that is prohibited from being posted on the Internet. The bill requires the chief appraiser for each appraisal district to ensure that any information indicating the age of a property owner that is posted on a website controlled by the appraisal district is removed from the website not later than the bill's effective date. EFFECTIVE DATE - September 1, 2015

5. A summary of HB 394 prepared by Perdue, Brandon, Fielder, Collins & Mott LLP describes this bill and Tax Code Section 25.027 as follows:


EXCEPTIONS TO POSTING CERTAIN OVER-65 HOMEOWNER INFORMATION TO CAD WEBSITE HB 394 McClendon Amends 25.027 HB 394 restricts the CAD from posting information that indicates the age of a property owner, including information that a property owner is 65 years of age or older, on the appraisal district’s website. This may include whether the property owner qualifies for the over 65 homestead exemption, the tax ceiling or a tax deferral. Effective: 9/1/2015. Status: HB 394 signed by Governor 6/10/15.

6. On the other hand, some appraisal districts are not interpreting Tax Code Section 25.027 in this way, and are continuing to disclose the over-65 exemption on the face of the tax certificate.

7. It is imperative for the closer to determine how the taxing units in the counties in which the closer conducts closings is interpreting this provision.

8. Some title companies have determined that it is a best practice to call the tax appraiser about every single transaction they close to determine if there is an over-65 exemption on the property that needs to be considered when calculating the prorations for the closing.

V. TAXES AND TITLE INSURANCE

Coverage Provided by Title Policy

1. What is covered by the terms of the policy? The title policy protects against loss or damage resulting from unpaid taxes and assessments for all years prior to the date of the policy - except taxes and assessments removed from coverage by an exception.

2. What is removed from coverage by the standard Schedule B exception? Here’s the wording of the Schedule B exception that removes taxes from coverage under the policy:

Standby fees, taxes and assessments by any taxing authority for the year _____ and subsequent years, and subsequent taxes and assessments by any taxing authority for prior years due to change in land usage or ownership, but not those taxes or assessments for prior years because of an exemption granted to a previous owner of the property under Section 11.13, Texas Tax Code, or because of improvements not assessed for a previous tax year. If Texas Short Form Residential Mortgagee Policy of Title Insurance (T-2R) is issued, that policy will substitute "which becom e due and payab le subseq uent to Date of Pol ic y" in l ieu o f " f o r the year _____ and subsequent years . ")

The sentence in bold and underlined above isn’t really an exception – in fact, it is an exception to the exception. It tells the insured that they are covered with regard to taxes for prior years resulting from a lost homestead or “over 65” or “disability” exemption. (“supplemental tax coverage”)

The risk created by this supplemental tax coverage is why it is so important for the title company to understand and address the various issues relating to the over-65 tax exemption that were discussed in this paper.


Exhibit “A”


Exhibit “B”

Lisa M. Beville

Attorney, Regional Education Coordinator

Fidelity National Title Group

Dallas, Texas

Ad Valorem Taxes & the Over-65 Exemption – Pro Rate, Transport or Rollback?

2016 TEXAS LAND TITLE INSTITUTE

Basics of Exemptions

Basics of Exemptions. Every year:Appraisal Districts determines property values

as of January 1st. Taxing Units set tax rates. The tax rate is applied to the property’s value to

determine the amount of tax due. An exemption removes part of the value of the

property and thus lowers the taxes.

2016 TEXAS LAND TITLE INSTITUTE

Basics of Exemptions

Taxpayer responsibilities To receive = applyWhen no longer qualify =

notify Residence Homestead

General criteria Types of homestead

exemptions: School, county, etc. 65 or older Disability

Residence HS – General Criteria

Taxpayer must own the home on January 1. The homestead may be owned by a Trust,

as long as the trustor occupies the residence.

If the taxpayer temporarily moves away, the exemption is still available, as long at there is intent to return and no other HS is established.

General rule: you may only have the HS exemption on one residence in any year.

Over 65 – General Criteria

Age 65 or Older Homeowners – $10,000 additional exemption for school taxes. An optional $3,000 may also be offered by any taxing unit.

The owner must be age 65 or older – and may apply immediately following the 65th birthday.

May be continued by a surviving spouse who is 55 years of age or older on the date the qualifying spouse died.

The owner – or surviving spouse – must also meet the General Criteria for homestead exemptions.

Additional Benefits of Being 65 or Older

For homeowners 65 or older (or with disability):Transfer exemptionTax ceiling InstallmentsDefer tax payment

Prorations

At closing, taxes must be divided between the buyer and the seller based on the fractional portion of the year that each owns the property.

Note: the seller doesn’t actually “pay” any taxes at closing.

Prorations

Paragraph 13 of the current TREC One to Four Family Residential Contract (Resale) addresses tax prorations as follows:

Taxes for the current year, interest, maintenance fees, assessments, dues and rents will be prorated through the Closing Date. The tax proration may be calculated taking into consideration any change in exemptions that will affect the current year’s taxes. If taxes for the current year vary from the amount prorated at closing, the parties shall adjust the prorations when tax statements for the current year are available. If taxes are not paid at or prior to closing, Buyer shall pay taxes for the current year.

Prorations

If the tax bills have not been issued, the proration will be based on the valuation and tax rate from the previous year.

If improvements were added during the year, an updated valuation must be obtained for use in the proration.

Any tax exemptions that were applicable to the seller but are not available to the buyer should also be taken into account.

Tax Proration Agreement

A Tax Proration Agreement should be signed by the buyer and the seller at closing to disclose and acknowledge: The source of the information used to

make the proration calculation; and The continuing liability of the parties for

the payment of taxes on the property. See Exhibit “A” for a Sample Tax

Proration Agreement.

Prorations

If, according to the tax certificate or online appraisal district information, the title company notes that the property was subject to an “over 65” exemption for the previous year,

the title company will ask questions in order to properly handle tax responsibilities – both with regard to taxes for prior years and for proper proration of taxes for the current year.

Caveat: See discussion of HB394 at Section IV below.

Prorations

The questions, and guidance based on the answer to the questions, are found in the paper at pages 5-7.

The questions are: Is the exemption still in place for the current year? How old is the current owner?

Owner is over 65 Owner is younger than 65 Seller is over 65

Does the seller plan on purchasing a new home in Texas?

Prorations

The answers to these 3 questions provide guidance to the closer re: how to deal with the over-65 exemption in the proration calculation.

If the owner no longer resides in the house or is now selling the house, there is a potential problem because the exemption may have been lost.

We will discuss “lost exemptions” momentarily.

Prorations – Seller is Over 65

As a general rule, when an “over 65” taxpayer sells his home, the tax office leaves the exemption in place for the year of the sale, unless the taxpayer purchases another residence in Texas and applies to have the exemption on the new home.

Because of a change to the tax laws a decade ago, a seller who is enjoying the benefits of an over 65 exemption on his current home may take that exemption with him to a new home.


Here is the Texas Comptroller’s office explanation in the 2008 taxpayer rights and remedies publication: If you do not claim another homestead in the same year, you

will receive the aged 65 or older exemption for the full year. If you claim another homestead during the same year, you will no longer qualify for the exemption on the old home for the remaining portion of that year. Taxing units will prorate the taxes based on the number of days elapsing after you no longer qualify for the exemption, to the end of the year.


In practice, however, there are 3 ways that the transfer of the over-65 exemption issue may be addressed by a tax assessor: remove the over-65 exemption from the old property for

the entire year and apply it to the new property for the entire year;

leave the over-65 exemption on the old property for the portion of the year the over-65 taxpayer owned the property and then move the exemption to the new property for the remainder of the year; or

leave the over 65 exemption on the old property for the entire year then start the over 65 exemption on the new property on January 1st of the following year.


Tax Code Section 26.10 (b) appears to contemplate the second option listed above.

Because different county assessors take a different view of how to address the transfer of an over 65 exemption, it is the closer’s responsibility to know how the applicable taxing units operate when preparing prorations for a closing.

Over 65 Seller Buying New Texas Home

If the seller is not buying a new home in Texas, the over-65 exemption will most likely remain on the property the entire year, so the buyer should be advised that taxes will be higher the following year.

If the seller is buying a new Texas home, the closer will need to know whether or not the taxing units in that county prorate taxes when an over 65 exemption is transferred during the calendar year.


When taxing units do prorate over 65 exemptions: Prorate taxes by including the over 65 exemption for the

portion of the year the seller owned the property, but not for the portion of the year the buyer will own the property;

Advise the buyer that taxes for the year will be partially with and partially without the exemption;

require the buyer to sign a hold harmless agreement that acknowledges that taxes will be higher; (See Sample Hold Harmless Agreement at Exhibit “B.”) and

Advise the lender, if any, of the estimate of taxes for the year – partially with and partially without the exemption –and establish reserves according to the lender’s written instructions.


When taxing units do not prorate over 65 exemptions: Prorate taxes for the year without the over 65 exemption. Advise the seller that when he applies for an exemption

on the new home, the exemption will be removed from the current home for the year.

Advise any lender that taxes for the current year will be without the exemption – and establish reserves according to the lender’s written instructions.

Lost Exemptions & Supplemental Taxes

If the tax office discovers that a property owner no longer qualifies for an exemption, the tax office may remove the exemption and issue a supplemental tax bill for up to 5 years.

Interest and penalties will also be due.

The same is true for missed improvements.


Most taxing units will not issue a supplemental tax bill, nor collect any supplemental tax that is due, until after January 1 of the following year.

Sometime after January 1 of the following year, the taxing units will mail a bill for the supplemental taxes to the taxpayer of record – the buyer.

“Supplemental tax bills” are covered by title insurance policies – and there is no rule permitting the title company to remove this coverage.


The title company must deal with this issue using guidelines similar to the following: Contact the Appraisal District and “blow the whistle” re:

the existence of a lost exemption. Contact Taxing Units.

If they will accept payment – collect from the seller at closing and pay the supplemental tax at funding.

If they will not accept payment, the title company may want to estimate and escrow in order to pay the supplemental taxes later.

Additional Closing Considerations

Because title policies insure against supplemental taxes, title companies will review the file for “red flags” that could indicate that the property is receiving an exemption to which it is not entitled: Seller on the contract is not the same person as the

owner named on the tax certificate. A relocation company is selling with exemptions shown on

the tax certificate. The Seller’s Disclosure Notice shows property is not

owner occupied. Sale out of an estate or by heirs with exemptions shown

on the tax certificate.

Additional Closing Considerations

If the title company believes the property is receiving an exemption by error or for which it is not entitled, they may require the seller to advise the Appraisal District of that fact and obtain corrected tax statements before closing, where possible.

The appraisal district will remove exemptions for all years in which the exemption was not allowed, so the tax bill could be substantial.

Tax Ceiling Issues

A tax ceiling is a limit on the amount of taxes a homeowner must pay on his/her residence.

If the owner qualifies their home for an over 65 exemption for school taxes, the school taxes on that home can't increase as long as the owner owns and occupies that home.

The tax ceiling is the amount of school taxes the owner pays in the year they qualified for the over 65 exemption.

The school taxes on the home may go below the ceiling but not above the amount of the ceiling.

Tax Ceiling Issues

If the owner improves the home (other than normal repairs or maintenance), the tax ceiling may go higher for the new additions.

If the over 65 property owner moves to another home, a percentage of the school tax ceiling may be transferred.

Tax Ceiling Issues

Question: When the over 65 property owner moves to another

home and transfers a percentage of their school tax ceiling to the new home, what happens to the school taxes on the “old” property from which the ceiling was transferred?

Can the appraisal district say “the ceiling has been transferred, so now we can bump the school taxes up for the remainder of the year to what they would have been if the ceiling had not been on the property?”

Tax Ceiling Issues

Answer: Apparently, some appraisal districts say “yes.” So,

when the over 65 seller sells the property to someone who doesn’t qualify for the over 65 exemption, the appraisal district is assessing school taxes on the property for the remainder of the year as if the property did not have a tax ceiling.

The research conducted to prepare this paper was not successful in finding anything about this issue. However, it is the closer’s responsibility to know how the applicable taxing units operate when it comes to tax ceiling issues.

Texas HB394 Issues

HB 394 amended Section 25.027 of the Texas Tax Code to read as follows:

Sec. 25.027. RESTRICTION ON POSTING INFORMATION ON

INTERNET WEBSITE. (a) Information in appraisal records may not

be posted on the Internet if the information:

(1) is a photograph, sketch, or floor plan of an

improvement to real property that is designed primarily for use

as a human residence; or

(2) indicates the age of a property owner, including

information indicating that a property owner is 65 years of age

or older.

(b) Subsection (a)(1) does not apply to an aerial

photograph that depicts five or more separately owned buildings.

Texas HB394 Issues

Of particular interest to this discussion is provision (a)(2), which indicates that the age of a property owner cannot be posted on the tax appraiser’s website.

The title industry is now finding out that some Appraisal Districts are reading this provision to say that neither the tax certificate nor online appraisal district information can disclose that a property is subject to an over 65 exemption.

Texas HB394 Issues

For example, the Montgomery County Appraisal District website includes the following Q&A:

Why does the website no longer indicate I have an Over 65 exemption? Notice: House Bill 394 H.B. 394 amends the Tax Code to include information that indicates the age of a property owner, including information indicating that a property owner is 65 years of age or older, among the information in property tax appraisal records that is prohibited from being posted on the Internet. The bill requires the chief appraiser for each appraisal district to ensure that any information indicating the age of a property owner that is posted on a website controlled by the appraisal district is removed from the website not later than the bill's effective date. EFFECTIVE DATE - September 1, 2015

Texas HB394 Issues

Similarly, a summary of HB 394 prepared by Perdue, Brandon, Fielder, Collins & Mott LLP describes this bill and Tax Code Section 25.027 as follows:

EXCEPTIONS TO POSTING CERTAIN OVER-65 HOMEOWNER INFORMATION TO CAD WEBSITE HB 394 McClendon Amends 25.027 HB 394 restricts the CAD from posting information that indicates the age of a property owner, including information that a property owner is 65 years of age or older, on the appraisal district’s website. This may include whether the property owner qualifies for the over 65 homestead exemption, the tax ceiling or a tax deferral. Effective: 9/1/2015. Status: HB 394 signed by Governor 6/10/15.

Texas HB394 Issues

Some appraisal districts are not interpreting Tax Code Section 25.027 as described above, and are continuing to disclose the over-65 exemption on the face of the tax certificate.

It is imperative for the closer to determine how the taxing units in the counties in which the closer conducts closings is interpreting this provision.

Some title companies have determined that it is a best practice to call the tax appraiser about every single transaction they close to determine if there is an over-65 exemption on the property that needs to be considered when calculating the prorations for the closing.

Tax Coverage Provided by Title Insurance Policies

The title policy protects against loss or damage resulting from unpaid taxes and assessments for all years prior to the date of the policy - except taxes and assessments removed from coverage by an exception.

Here’s the wording of the Schedule B tax exception (emphasis added):

Standby fees, taxes and assessments by any taxing authority for the year _____ and subsequent years, and subsequent taxes and assessments by any taxing authority for prior years due to change in land usage or ownership, but not those taxes or assessments for prior years because of an exemption granted to a previous owner of the property under Section 11.13, Texas Tax Code, or because of improvements not assessed for a previous tax year. If Texas Short Form Residential Mortgagee Policy of Title Insurance (T-2R) is issued, that policy will substitute "which become due and payab le subsequent to Date of Po l icy" in l ieu of " fo r the year _____ and subsequent years . ")

Tax Coverage Provided by Title Insurance Policies

The sentence in bold and underlined above isn’t really an exception – in fact, it is an exception to the exception.

This sentence tells the insured that they are covered with regard to taxes for prior years resulting from a lost homestead or “over 65” or “disability” exemption. (Sometimes called “supplemental tax coverage.”)

The risk and potential liability created by this supplemental tax coverage is why it is so important for title companies to understand and address the various issues relating to the over-65 tax exemption that we have discussed today.

© 2013 Fidelity National Financial. All Rights Reserved.

Documents

Ad Valorem Taxes & the Over- 65 Exemption Pro Rate ...€¦ · 2016 Texas Land Title Institute - Ad Valorem Taxes – Pro Rate, Transport or Rollback? Page 2 of 14 Ad Valorem Taxes