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Chapter 3: Ad Valorem Taxes and Valuation
|  Chapter 317CHAPTER03Learning ObjectivesAfter this chapter, you will be able to→  Understand ad valorem tax best practices and guidelines.→  Understand the license holder’s role in assisting property owners protesting property taxes.→  Explain Paragraph 13 – Prorations and how rollback taxes function.→  Recall the tax exemptions allowed in Texas, and describe license holder best practices in advising a client seeking a tax exemption.The Central Appraisal District SystemPrior to the establishment of county-based central appraisal districts, each of the over 3,500 real property taxing entities in Texas valued real estate in their juris-diction in their own manner. There are 253 central appraisal districts in Texas based on county lines. While there are 254 counties in Texas, two counties share one district. The appraisal districts are charged with assessing the fair market value of each and every real property in their district, liter-ally millions of tracts of land in Texas. Additionally, the districts assess the value of business personal property. The Texas Comptroller of Public Accounts oversees the entire ad valorem tax appraisal system. Ad valorem is a Latin term that means “according to value.”Property Taxes On the RiseLicense holders may be asked to assist clients in preparation for their client’s property tax protest hear-ings at appraisal district offices. Geographically competent agents must understand the process of ad valorem taxation in Texas, but they must be equally careful not to venture into provid-ing advice to their clients on how to minimize taxes or protest the valuations. License holders can assist their clients in preparation of competitive market analyses, broker price opinions, and other credible evidence of comparable property closed sales. Ad valorem tax valuation lies in the jurisdiction of attorneys, appraisers and ad valorem property tax consultants.AD VALOREM TAXES AND VALUATION
Trivia: Which two Texas counties share one appraisal district office?
Potter County and Randall County located in the Panhandle of Texas.

|  Chapter 318According to the Comptroller, a property owner may protest the value of a property in the following situations:* The value the appraisal district placed on the property is too high;* The property is unequally appraised;* The appraisal district denied a special appraisal, such as open-space land, or incorrectly denied your exemption application; * The appraisal failed to provide the required notices; and, * Other matters prescribed by Tax Code 41.41(a). Listed below are ways a property owner can protest proposed valuation. * A property owner can request an informal review with an appraisal district representative to gain an understanding of the reasoning behind the pro-posed valuation. This is also an opportunity to present arguments for an alternative opinion of value. The Comptroller suggests that a property owner file the Notice of Protest, even if the owner feels the dispute will be resolved informally. This preserves the owner’s right to protest.* Upon finding no remedy in the informal review, the property owner has an opportunity to appear in a hearing with the representatives of the ARB. Representatives in counties with a population under 120,000 are appointed by local appraisal districts.  Representatives in larger counties are appointed by the local administrative law judge.* If the property owner is dissatisfied with the ARB’s decision, the owner has the right to appeal the decision.* Dependent upon the facts and type of property, the property owner may file the appeal with the local district court, appeal to binding arbitration, or may appeal to the State Office of Administrative Hearings (SOAH.) License holders should advise their clients who have chosen to appeal to consult an attorney. The attorney may ask the license holder to assist in research.More information is available on the Comptroller’s Property Tax Assistance website https://comptroller.texas.gov/taxes/property-tax/ under these titles:* Appraisal Protests and Appeals;* Appraisal Review Board Manual; * Paying Your Taxes;* Property Tax Basics;* Taxpayer Bill of Rights;* Texas Property Tax Code; and,* Valuing Property. Rate ProposalsOverlooked by many people in Texas who tend to only focus on the assessed values of their properties, is the proposed tax rates established by each of the gov-ernment entities that have ad valorem taxation author-ity. Generally, in Texas, public school district (those up to the 12th grade) ad valorem taxes make up around 50% of the total annual property tax invoice. Prop-erty owners and geographically competent real estate license holders should be aware or even consider becoming active in the public hearings held by the taxing authorities presenting their annual ad valorem tax rates.Protesting Property Taxes According to the Texas Comptroller of Public Accounts publication titled “Property Taxpayer Reme-dies,” the central appraisal districts:“must send required notices by May 1, or by April 1 if your property is a residential homestead, or as soon as practically possible [emphasis added]. The notice must separate the appraised value of real and personal property. If the appraised value is increased, the notice must show an estimate of how much tax you would have to pay based on the same tax rate your city, county, school district, and any special purpose district set the previous year.”  If a property owner disagrees with the proposed appraised value they are encouraged to file a Notice of Protest with the Appraisal Review Board (ARB). The ARB is an independent, impartial group of citizens authorized to resolve disputes between taxpayers and the appraisal district. The Comptroller offers a form for use at http://comptroller.texas.gov/forms/50-132.pdf. Many people in Texas have expressed frustration with the process of protesting ad valorem tax valuations. The appraisal districts are allowed local discretion in their interpretation and implementation of the Property Tax Code. Because ad valorem tax issues are so complex and varied, license holders who are not attorneys or ad valorem tax experts should steer clear of giving ad valorem tax advice to their clients.This is yet another example of why geographic com-petency of license holders is essential. The appraisal districts have discretion in the valuation process that can be unique to their jurisdiction. A geographically competent license holder could assist their client in finding out the local appraisal district’s process, but should not interpret or offer advice about how to nav-igate the process. License holders should advise their clients to seek assistance of an appraiser, attorney, or ad valorem property tax expert. 
|  Chapter 319valuations, the license holder should advise the client to consult with an attorney or ad valorem tax expert.Paragraph 13 - ProrationsParagraph 13 of the One to Four Family Residential Contract (Resale) addresses ad valorem tax prorations. Often, the closing will occur before the current year’s valuation has been proposed and the tax rates for that year are known. The title company will estimate the taxes based upon the best available information at the time, and then prorate.Similarly, Paragraph 13 of the Farm and Ranch con-tract addresses ad valorem tax prorations, but include additional information in (13) (A) due to the unique characteristics of farm and ranch properties. Paragraph (13) (B) relates to rollback taxes.If the land is qualified for an agricultural appraisal, but the property owner changes its use to non-agricul-tural, the property owner will owe a rollback tax for each of the previous three (3) years in which the land received the lower appraisal. The rollback tax is the dif-ference between the taxes paid on the land’s agricul-tural value and the taxes that would have been paid if the land had been taxed at a higher market value.Effective June 15, 2021, HB 3833 amended Section 23.55 of the Texas Property Tax Code to remove the 5% interest that was previously added to the rollback tax calculation.The chief appraiser determines if a change to a non-agricultural use has been made and sends a notice of the change. If the property owner disagrees, the owner may file a protest with the Appraisal Review Board (ARB). The owner must file the protest within 30 How may a license holder assist a client in the valuation process? * A geographically competent agent may provide accurate comparable sales data to the client; and, * A geographically competent agent may recom-mend attorneys, licensed appraisers, property tax consultants, and other professionals to assist the client in preparation for their valuation arguments. Special ConsiderationsIt is not uncommon for civil engineers, architects and other professionals to consult on unique characteristics of commercial property and the impact on value. Sim-ilarly, hydrologists, agricultural business professionals, and other professional consultants may be called upon to offer opinions on unique characteristics of farm and/or ranch property and the impact on value. License holders should guard against providing any advice to their clients that is outside their area of expertise.Property Tax ExemptionsExemptions and special valuations available to prop-erty owners include:a. Homestead exemption;b. Over 65 exemption;c. Agricultural valuation; andd. Wildlife valuations.Unless the license holder is geographically com-petent to advise the client in how to qualify and obtain approval for one of the exemptions or special Initialed for identification by Buyer                       and Seller              TREC NO. 20-15   Contract Concerning                                                                                                                         Page 6 of 11      11-10-2020     (Address of Property)    (3) Seller and Buyer shall execute and deliver any notices, statements, certificates, affidavits, releases,  loan  documents  and  other  documents  reasonably  required  for  the  closing  of  the  sale and the issuance of the Title Policy. (4) There will be no liens, assessments, or security interests against the Property which will not be  satisfied  out  of  the  sales  proceeds  unless  securing  the  payment  of  any  loans  assumed  by Buyer and assumed loans will not be in default.  10.  POSSESSION:  A. BUYER’S POSSESSION: Seller shall deliver to Buyer possession of the Property in its present or required condition, ordinary wear and tear excepted: upon closing and funding according to a temporary residential lease form promulgated by TREC or other written lease required by the  parties.  Any  possession  by  Buyer  prior    to  closing  or  by  Seller  after  closing  which  is  not  authorized  by  a  written  lease  will  establish  a  tenancy  at  sufferance  relationship  between  the  parties.  Consult  your  insurance  agent  prior  to  change  of  ownership  and  possession  because  insurance coverage may be limited or terminated. The absence of a written lease or appropriate insurance coverage may expose the parties to economic loss. B.  SMART  DEVICES:  “Smart  Device”  means  a  device  that  connects  to  the  internet  to  enable  remote use, monitoring, and management of: (i) the Property; (ii) items identified in any Non-Realty Items Addendum; or (iii) items in a Fixture Lease assigned to Buyer. At the time Seller delivers possession of the Property to Buyer, Seller shall: (1)  deliver  to  Buyer  written  information  containing  all  access  codes,  usernames,  passwords,  and  applications  Buyer  will  need  to  access,  operate,  manage,  and  control  the  Smart  Devices; and (2)  terminate  and  remove  all  access  and  connections  to  the  improvements  and  accessories  from any of Seller’s personal devices including but not limited to phones and computers. 11. SPECIAL  PROVISIONS: (Insert only factual statements and business details applicable to  the  sale.    TREC  rules  prohibit    license  holders  from  adding  factual  statements    or    business    details  for  which  a  contract  addendum,  lease  or  other  form  has  been  promulgated  by  TREC  for  mandatory use.)       12. SETTLEMENT AND OTHER EXPENSES: A. The following expenses must be paid at or prior to closing: (1) Expenses payable by Seller (Seller's Expenses): (a) Releases of existing liens, including prepayment penalties and recording fees; release of Seller’s  loan  liability;  tax  statements  or  certificates;  preparation  of  deed;  one-half  of  escrow fee; and other expenses payable by Seller under this contract. (b) Seller shall also pay an amount not to exceed $  to  be  applied  in  the following  order:  Buyer’s  Expenses  which  Buyer  is  prohibited  from  paying  by  FHA,  VA,  Texas  Veterans  Land  Board  or  other  governmental  loan  programs,  and  then  to  other  Buyer’s Expenses as allowed by the lender. (2)  Expenses  payable  by  Buyer  (Buyer's  Expenses):  Appraisal  fees;  loan  application  fees;  origination  charges;  credit  reports;  preparation  of  loan  documents;  interest  on  the  notes  from  date  of  disbursement  to  one  month  prior  to  dates  of  first  monthly  payments;  recording  fees;  copies  of  easements  and  restrictions;  loan  title  policy  with  endorsements  required  by  lender;  loan-related  inspection  fees;  photos;  amortization  schedules;  one-half  of  escrow  fee;  all  prepaid  items,  including  required  premiums  for  flood  and  hazard  insurance,  reserve  deposits  for  insurance,  ad  valorem  taxes  and  special  governmental  assessments;  final  compliance  inspection;  courier  fee;  repair  inspection; underwriting fee; wire  transfer  fee;  expenses  incident  to  any  loan;  Private  Mortgage  Insurance  Premium  (PMI), VA Loan Funding Fee, or FHA Mortgage Insurance Premium (MIP) as required by the lender; and other expenses payable by Buyer under this contract. B.  If  any  expense  exceeds  an  amount  expressly  stated  in  this  contract  for  such  expense  to  be  paid  by  a  party,  that  party  may  terminate  this  contract  unless  the  other  party  agrees  to  pay  such  excess.  Buyer  may  not  pay  charges  and  fees  expressly  prohibited  by  FHA,  VA,  Texas  Veterans Land Board or other governmental loan program regulations. 13.  PRORATIONS:  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.     TREC NO. 25-13   Contract Concerning                                                                                                                    Page 6 of 11      11-10-2020(Address of Property)    Initialed for identification by Buyer                       and Seller          B. SMART DEVICES: “Smart Device” means a device that connects to the internet to enable remote use,  monitoring,  and  management  of:  (i)  the  Property;  (ii)  items  identified  in  any  Non-Realty  Items Addendum; or (iii) items in a Fixture Lease assigned to Buyer. At the time Seller delivers possession of the Property to Buyer, Seller shall: (1) deliver to Buyer written information containing all access codes, usernames, passwords, and applications Buyer will need to access, operate, manage, and control the Smart Devices; and (2) terminate and remove all access and connections to the improvements and accessories from any of Seller’s personal devices including but not limited to phones and computers. 11.  SPECIAL  PROVISIONS:  (Insert only factual statements and business details applicable to the sale. TREC rules prohibit license holders from adding factual statements or business details for which a contract addendum or other form has been promulgated by TREC for mandatory use.)            12.  SETTLEMENT AND OTHER EXPENSES: A. The following expenses must be paid at or prior to closing: (1) Expenses payable by Seller (Seller's Expenses):   (a) Releases of existing liens, including prepayment penalties and recording fees; release of Seller’s  loan  liability;  tax  statements  or  certificates;  preparation  of  deed;  one-half  of  escrow fee; and other expenses payable by Seller under this contract. (b) Seller shall also pay an amount not to exceed $      to   be   applied   in   the following  order:  Buyer’s  Expenses  which  Buyer  is  prohibited  from  paying  by  FHA,  VA,  Texas  Veterans  Land  Board  or  other  governmental  loan  programs,  and  then  to  other  Buyer’s Expenses as allowed by the lender. (2)  Expenses  payable  by  Buyer  (Buyer's  Expenses)  Appraisal  fees;  loan  application  fees;  origination  charges;  credit  reports;  preparation  of  loan  documents;  interest  on  the  notes  from date of disbursement to one month prior to dates of first monthly payments; recording fees;  copies  of  easements  and  restrictions;  loan  title  policy  with  endorsements  required  by  lender; loan-related inspection fees; photos; amortization schedules; one-half of escrow fee; all  prepaid  items,  including  required  premiums  for  flood  and  hazard  insurance,  reserve  deposits  for  insurance,  ad  valorem  taxes  and  special  governmental  assessments;  final  compliance  inspection;  courier  fee;  repair  inspection;  underwriting  fee;  wire  transfer  fee;  expenses incident to any loan; Private Mortgage Insurance Premium (PMI), VA Loan Funding Fee,  or  FHA  Mortgage  Insurance  Premium  (MIP)  as  required  by  the  lender;  and  other  expenses payable by Buyer under this contract. B. If any expense exceeds an amount expressly stated in this contract for such expense to be paid by  a  party,  that  party  may  terminate  this  contract  unless  the  other  party  agrees  to  pay  such  excess.  Buyer may not pay charges and fees expressly prohibited by FHA, VA, Texas Veterans Land Board or other governmental loan program regulations. 13.  PRORATIONS AND ROLLBACK TAXES:   A.  PRORATIONS:    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. Rentals which are unknown at time of closing will be prorated between Buyer and Seller when they become known.   B.  ROLLBACK  TAXES:    If  this  sale  or  Buyer’s  use  of  the  Property  after  closing  results  in  the  assessment of additional taxes, penalties or interest (Assessments) for periods prior to closing, the Assessments will be the obligation of Buyer.  If Assessments are imposed because of Seller’s use or change in use of the Property prior to closing, the Assessments will be the obligation of Seller. Obligations imposed by this paragraph will survive closing. 14. CASUALTY  LOSS: If any part of the Property is damaged or destroyed by fire or other casualty  after  the  Effective  Date  of  this  contract,  Seller  shall  restore  the  Property  to  its  previous  condition as soon as reasonably possible, but in any event by the Closing Date. If Seller fails to do so  due  to  factors  beyond  Seller’s  control,  Buyer  may (a)  terminate  this  contract  and  the  earnest  money  will  be  refunded  to  Buyer,  (b)  extend  the  time  for  performance  up  to  15  days  and  the  Closing Date will be extended as necessary or (c) accept the Property in its damaged condition with an assignment of insurance proceeds, if permitted by Seller’s insurance carrier,  and receive credit from  Seller  at  closing  in  the  amount  of  the  deductible  under  the  insurance  policy.  Seller’s  obligations  under  this  paragraph  are  independent  of  any  other  obligations  of  Seller  under  this  contract.  
|  Chapter 320Case Study 4Broker Edward is in the process of obtaining a 640-acre farm and ranch listing in West Texas. Edward realizes 600 acres of the property is used for a year-round youth camp. Edward knows the seller has an agricultural valuation for 600 acres of the property. Edward suspects the appraisal district has not audited the agricultural valuation in many years. How does Edward represent the ad valorem taxation of the property to potential buyers? Are there potential problems for the seller? Are there problems that may survive the closing?Case Study 5Broker Bill served as a buyer’s agent in a res-idential transaction on Lake Travis in Austin that closed in November. The following year, his client was furious about a huge property valuation increase proposed by the Travis Central Appraisal District. The client asked Bill to represent him at the informal hearing, compile comparable data for the potential ARB hearings, and possibly a district court trial. The client all but demanded Bill’s help. What can Bill do? What should Bill do?Case Study 6Sales agent Delia is representing a buyer new to Plano.  The Seller’s Disclosure Notice her client receives shows absolutely no defects current or prior. However, Delia noticed the Collin Central Appraisal District website shows that the home’s property valuation declined for the two prior con-secutive years. What should Delia advise her client to do?days of the date the notice was mailed. The ARB then decides the outcome. If the property owner does not protest or if the ARB decides against the owner’s posi-tion, the owner owes the rollback tax, subject to the due process of appeal by the owner. The Farm and Ranch contract form clearly places the obligation to pay the rollback taxes on the party (buyer or seller) who changes the use. Note that paragraph (13) (B) “survives the closing.”Rollback Taxes While a license holder could assist their client in researching the consequences of rollback determina-tions, the warning is clear – the appraisal district deter-mines the final rollback cost. As a best practice license holders should advise their clients to contact the appraisal district to fully under-stand the consequences of a change of use from agri-cultural valuation to a non-agricultural in a particular district.In ConclusionWith the news of increasing demand for property in Texas as evidenced by the current market conditions, ad valorem taxes will surely increase for all Texas prop-erty owners. License holders may assist their clients by: 1. Helping them understand the process of ad valorem taxation in Texas; 2. Providing them with research sources available to the public, such as comparable sales information; and3. Recommending they consult an attorney or ad valorem tax expert.License holder should NOT1. Offer opinions about ad valorem valuation meth-odology (unless the license holder holds an appraisal license);2. Offer advice regarding ad valorem tax valuation or exemption processes; or3. Avoid advice about how to protest a tax valuation or denial of a special exemption or valuation.
Case Study 4
Broker Edward must share his knowledge of the agricultural valuation with his seller. Edward has become aware of the fact the appraisal district has not audited the ag valuation in many years. If Edward is competent to conduct brokerage in the farm and ranch industry, he must know about roll back penalties for changes in use. First, Edward must ask the seller if the seller had an attorney or ad valorem tax consultant confirm that the current use of the property as a youth camp qualifies or disqualifies the property for an agricultural valuation (it does disqualify it). Next, whether or not the seller knows the answer, Edward must disclose the questionable situation to any and all prospective buyers.

The Texas Occupations Code Chapter 1101, section 1101.652 (b) (3 and 4) requires license holders to disclose actually known defects to potential buyers. The TREC Canons of Ethics require the license holder to treat other parties to a transaction fairly. The Canons also place fiduciary duties on Edward in relation to his selling client. Edward must be scrupulous and meticulous in his work, and must employ prudence and caution to avoid misrepresentation, by acts of commission on omission. If Edward did not ask about the circumstances, he would not be acting scrupulously and meticulously. This would be an act of omission. Whether or not the current use disqualifies the property from an ag valuation is a material issue. If the current use disqualifies the property from an ag valuation, it indicates the situation is a known defect. The seller could be very uncomfortable publicizing the use as a youth camp. It could alert the appraisal district and trigger roll back penalties whether or not the seller closes the transaction. A prudent seller must disclose this issue to potential buyers. The problem will survive the closing, and the issue of any use that eliminates the ag valuation should be negotiated and solved prior to closing.

Case Study 5
Bill’s help is limited to his actual professional expertise in ad valorem taxation hearings and testimony at a district court trial. Bill is prohibited from offering advice in any area outside his expertise as a real estate license holder per the TREC Canons of Professional Conduct and Ethics §531.3 “Competency.” He may prepare a comparative market analysis or provide other research, although he has no duty to do so for a past client after the closing of the transaction. Bill can provide his past client with the names of professional ad valorem tax consultants that may assist with testimony. The best practice for Bill to take is to provide his past client with support but not advice or testimony.

Case Study 6
Delia has fiduciary duties to her client, one of which is to be scrupulous and meticulous in representation of the client’s interests. Delia should advise the client to consult an attorney who may help obtain information to determine why the district lowered the valuation. Additionally, Delia should ask the seller’s agent if they know why the valuation was reduced. If the answers to her questions are not forthcoming within the feasibility period of the purchase contract with the seller, then Delia should advise her client to seek an extension until the questions are answered to the client’s satisfaction.

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