As you may have heard, the citizens of Texas will vote on a Constitutional Amendment regarding property taxes on November 7, 2023. Proposition 4 if passed will raise the state mandated school tax homestead exemption to $100,000 from $40,000. There are several other aspects of Senate Bill 2 beyond the Texas Constitution that are intended to lower property taxes including a 10.7 cent (per $100 in property value) reduction in the school tax rate across the board for all properties.
These provisions if passed will be retroactively applied for the 2023 tax year, which commenced January 1, 2023. While this reduction should be welcome news to taxpayers, it does pose three complications for lenders and consumers who closed on a transaction in 2023, but before the tax reduction is formally approved in November.
First, please be advised that the tax bill to be released in October will identify the reduced taxes in anticipation of the reduction being adopted by voters in November. It will also identify the differential amount that would be due in the unlikely event that voters reject the proposed tax reduction.
Second, please be aware that the tax prorations that were used to allocate taxes between the buyer and the seller under the purchase agreement were most likely based on anticipated taxes BEFORE the reductions that may be approved in November. Accordingly, sellers may be entitled to their prorated portion of any savings based on the standard Texas Real Estate Commission sales contract. Buyers should be prepared for a diligent seller requesting an adjustment to the prorations based on the November reduction and such requests may come pretty immediately upon the tax reduction being approved but may also extend well into next year as more sellers become aware of their entitlement to a portion of the reduction for 2023 taxes.
Finally, buyers who escrow for their taxes may receive a portion of their escrowed taxes back in 2024 when the escrow analysis on their loan is performed. The estimated amount for the escrow for loans closing in 2023, prior to voters approving the reduction as anticipated in November, most likely will have been based on the estimated taxes before the anticipated November tax reductions. Accordingly, under the Real Estate Settlement Procedures Act, the servicer of the loan will analyze the escrow account and excess amounts, in any, will be rebated back to the borrower as required by law. Lenders will want to check with their escrow analysis software providers for the timelines of necessary adjustments following voter approval.
This information is provided as general information only and should not be considered as legal or tax advice as it relates to any particular person. Borrowers are encouraged to consult with their own tax and legal advisors to determine how the November tax reduction, if approved, might impact their particular situation, loan, or contract.