What Is a Value Limitation Adjustment?

A value limitation adjustment, often known as a homestead cap or homestead limitation, is a mechanism in property taxation designed to manage how quickly a property’s appraised value can increase each year. This adjustment helps to slow down the annual rise of a property tax bill by reducing the amount of value subject to taxation. It operates by setting a ceiling on the percentage increase in a residence homestead’s appraised value used for calculating property taxes. This limitation aims to provide homeowners with a degree of predictability regarding their future property tax obligations.

The Homestead Value Limitation

The homestead value limitation specifically restricts the annual increase in the appraised value of a residence homestead. Under Section 23.23 of the Tax Code, the appraised value for a residence homestead cannot increase by more than 10% per year.

This limitation applies to the “appraised value” used for taxation purposes, which can differ from the “market value” of the property. The market value represents what a property would likely sell for on the open market.

The “value limitation adjustment” itself is the difference between the property’s current market value and its capped appraised value. This difference effectively represents the portion of the market value that is not subject to taxation due to the limitation. For example, if a home’s market value increases by more than 10% in a year, the taxable appraised value will only rise by 10%, creating an adjustment that lowers the tax base.

This limitation takes effect on January 1 of the tax year following the year an owner first qualifies for a homestead exemption on that property. The appraisal district determines both the market value and the appraised value annually.

New Improvements and the Limitation

The homestead value limitation applies only to the existing value of a property. When new improvements are added to a residence homestead, their value is treated differently in the initial year. These new additions, such as a room expansion, a new garage, or other significant renovations, are appraised at their full market value in the year they are completed.

The full market value of these new improvements is added to the property’s capped appraised value from the previous year. For instance, if a homeowner adds a new swimming pool, the value of that pool is fully included in the property’s appraised value for the year it is completed. In subsequent years, the total combined value—which includes the original capped value plus the full value of the new improvements—then falls under the 10% limitation. This ensures that while new construction is fully taxed initially, its future value growth is also subject to the cap.

Limitation Versus Exemption

It is important to understand the distinction between a homestead value limitation and a homestead exemption, as they serve different but related purposes in reducing a homeowner’s property tax burden. A homestead exemption directly reduces the taxable value of a property by a specific dollar amount or percentage. For example, a common exemption might reduce a home’s value for school taxes by a set amount, lowering the base upon which taxes is calculated. This is a direct subtraction from the appraised value.

The homestead value limitation, conversely, does not directly reduce the property’s value by a specific amount. Instead, it places a cap on the annual increase in the property’s appraised value that can be used for taxation. This means it controls the rate at which the taxable value can grow each year. The limitation manages growth, and the exemption provides a fixed or percentage reduction. The homestead exemption is applied after the value limitation has been calculated, further lowering the tax bill from the already capped appraised value.

Non-Homestead Property Limitations

Beyond residence homesteads, a related limitation exists for certain non-homestead real properties, often referred to as a “circuit breaker” limitation. As of January 1, 2024, Section 23.231 of the Tax Code limits annual increases in appraised value for specific commercial, rental, and other non-homestead properties to 20%. This provision extends a similar protective measure to a broader range of property types.

This limitation applies to properties that are not residence homesteads and have an appraised value of $5 million or less, provided they are not owned by a publicly traded company or a publicly traded partnership. This “circuit breaker” aims to mitigate rapid increases in property tax bills for qualifying properties, providing stability and predictability for their owners.