Webinar: Taxes and Tax Liens: The What, Where, When and How of Taxes September 18, 2012

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1 Webinar: Taxes and Tax Liens: The What, Where, When and How of Taxes September 18, 2012

2 Taxes and Tax Liens Lisa. M Beville VP, Agency Support Services and Regional Education Coordinator Fidelity National Title Group Southwest Agency Division Tax Humor Introduction Taxation in Texas is controlled by: The Texas Constitution and The Texas Tax Code All property is subject to taxation, except for property owned by Governmental entities. Entities that are authorized to assess taxes include governmental entities such as the State, counties, cities/towns, school districts and utility districts. 1

3 Introduction Taxing entities set a tax rate each year, and assess the value of each property located within the boundaries of that taxing entity as of January 1 st. The tax rate is applied to the property s value to determine the amount of tax that is due. Because they are based on property value, real property taxes are often referred to as ad valorem taxes. Introduction Real property subject to taxation in Texas includes land, improvements, minerals, standing timber, and other interests in land such as easements and leasehold estates. Tax bills are sent out on or about October 1 of each year, and taxes become due and payable when the bill is received by the taxpayer. Taxes are not considered delinquent until February 1 st of the following year. The Basics On January 1 of each year, a lien attaches to all taxable property to secure all taxes, penalties and interest that become due on that property. The lien attaches by operation of law and requires no further action. All property taxes are the personal obligation of the owner of the property on January 1 st of the year in which the tax is imposed. 2

4 The Basics Ad valorem tax liens remain as a lien against real property until the taxes are paid or until the lien is foreclosed. However, if real property taxes have been delinquent for more than 20 years, a suit to enforce the personal obligation of the taxpayer may not be filed. Tax Lien Priority Super Priority Lien : An ad valorem tax lien takes priority over all other liens on and interests in the property, no matter when the other liens or interests attached. Tax liens take priority even over the owner s homestead interest in the property. Thus, a homestead in Texas can be foreclosed on for delinquent ad valorem taxes. Exemptions We ve said that the taxing entity will apply the tax rate they ve set to the value of the land to determine the amount of property taxes to be assessed. Exemptions reduce the value of the land to which the tax rate is applied, thus lowering the taxes. 3

5 Exemptions Taxpayer responsibilities To receive = apply When no longer qualify = notify Residence Homestead General criteria Types of homestead exemptions School, county, etc. 65 or older Disability Residence HS General Criteria Tax payer 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. Residence HS General Criteria Section of the Tax Code governs homestead exemptions. The general exemption is established on January 1 st and is good for the entire year, including the entire year of the homestead claimant s death. The exemption terminates on December 31 of the year of the homestead claimant s death. 4

6 Additional Benefits For homeowners 65 or older or with disability Transfer exemption Tax ceiling Installments Defer tax payment Over 65 General Criteria Effective as of January 1 of the year in which the taxpayer qualifies, regardless of when that occurs during the year. It remains on the property for the entire year of the claimant s death. A surviving spouse who was 55 or older at the time of the other spouse s death can piggy back on the exemption. Disabled Veteran or Survivor Not limited to HS property; instead, can be applied to any one property owned by the veteran (or the veteran s surviving spouse or child )on January 1 st. The property owner must be a veteran of the US Armed Forces, and must have been officially classified as disabled. The disability must be service related and the veteran must be a Texas resident. 5

7 HB 252 New Law Effective Homeowners who apply for a HS exemption must now provide proof that they live in the house they claim as their principal residence. HS applications must now: List each owner; State that no other HS is claimed; Include copy of DL; and Include copy of vehicle registration receipt. HB 252 New Law Effective If the applicant does not own a vehicle, an affidavit to that effect must be signed by the applicant and a copy of a utility bill for the property subject to the claimed exemption in the applicant s name must be attached to the application. The address on the driver s license and vehicle registration must match the address for which the homestead exemption is requested. Supplemental Tax Bills Several years ago Dallas County started to compare grantor s names in deed records with death records; Discovered many properties were not taxed correctly due to improperly claimed exemptions (homestead and over 65); Other counties began to follow suit. 6

8 Supplemental Tax Bills Policy claims in this area led to changes in the promulgated tax exception, effective January 1, The new language clarifies that the standard tax exception in Schedule B, item 5 does not protect the title company from claims based on the retroactive removal of a Section homestead exemption(s). Valuation Market Value All property must be appraised and taxed at its market value as of January 1 st. MV = the price a willing buyer would pay a willing seller when there is no pressure on either party to act. Agricultural Appraisal Land that is designated as agricultural use is appraised at its value based on the land s capacity to produce agricultural products. Ag use Valuation Lowers the taxable value of the land, resulting in lower taxes. Land may qualify for this valuation ( exemption ) by meeting either ag use or open space criteria. The Appraisal Office is required to determine and record both the market value and the ag use value of each property that has qualified for the ag use valuation. 7

9 Ag use Valuation When ag use property is sold or the use changes, rollback taxes equal to the amount of additional taxes that would have been paid in previous years had the ag use valuation not applied will become due. Previous 3 years if ag use criteria was met. Previous 5 years if open space criteria. Ag use Valuation A tax lien attaches immediately upon the sale or change in use. The tax assessor does not have to wait until January 1 st of the next year to have a lien on the property to secure payment of the rollback taxes. However, any rollback taxes, interest and/or penalties are not assessed immediately and cannot be collected and paid until a bill is sent to the taxpayer. Title Insurance Concerns If the Tax Assessor has not delivered bill for the rollback taxes, a title company has no authority to compute the taxes on its own, escrow the amount, and insure against the risk. Note: See discussion of rollback tax coverage below. The tax collector has no legal authority to accept payment of rollback taxes until a final determination of the amount due has been made and a supplemental tax bill mailed. 8

10 Title Insurance Concerns In 1995, the legislature enacted Sections and of the Texas Tax Code. These sections allow a lender to require that a borrower establish and maintain an escrow account to pay rollback taxes that may be assessed against ag use land or openspace land. Tax Bills and Payment of Taxes Tax bills are normally mailed out in October. The bill is for the calendar year: Jan. 1 Dec. 31. Taxpayers cannot withhold payment of taxes if the property s appraised value is being disputed; or as a way to protest government spending; or for any other reason. The deadline for paying the tax bill is Jan. 31; however, taxing units must allow taxpayers at least 21 days to pay after the original bill is mailed. Failure to Pay Taxes Taxes that remain unpaid on February 1 st are considered delinquent. Penalty and interest charges will be added. As a last resort, a lawsuit will be filed to foreclose the tax lien. No clear title until all taxes are paid in full. 9

11 Coverage Provided by Title Policy What is covered? Loss or damage for unpaid taxes for all years prior to the date of policy except taxes removed from coverage by an exception. Taxes on real property only. What is removed from coverage by standard exception Schedule B, Item 2: Coverage Provided by Title 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 year. Coverage Provided by Title Policy Standby fees, taxes and assessments by any taxing authority for the year and subsequent years, Ordinarily, if taxes are paid current or are being brought current at closing, you will simply complete the blank in the paragraph by inserting the next year. The year you insert in the blank is for taxes that have not been paid. (So, if the tax certificate shows taxes paid through the year 2011, you type 2012 in the blank.) 10

12 Standby Fee Texas Water Code Section (a) In this section: (1) "Standby fee" means a charge, other than a tax, imposed on undeveloped property for the availability of potable water, sanitary sewer, or drainage facilities and services. (k) A standby fee imposed under this section is a personal obligation of the person owning the undeveloped property on January 1 of the year for which the fee is assessed. A person is not relieved of the obligation on transfer of title to the property. On January 1 of each year, a lien attaches to undeveloped property to secure payment of any standby fee, interest on the fee, and any penalty imposed under this section. The lien has the same priority as a lien for taxes of the district. Coverage Provided by Title Policy and subsequent taxes and assessments by any taxing authority for prior years due to change in land usage or ownership, Remember, when a special valuations is removed (ag use or open space), the property is re appraised, new taxes are assessed and a lien is imposed. The standard tax exception removes liability for rollback taxes from coverage because it occurs in the future (after the date of the policy). However, P 20 B allows us to delete the clause noted above from a Loan Policy or ICB (but not an OTP), which means we cover the risk. Rollback Tax Coverage P 20 B A Company may not insure against rollback taxes unless: a. The Company has satisfactory evidence in its file that the assessed taxes for the current year are not based on an agriculture or open space valuation; or b. (i) The rollback taxes have been assessed by all of the taxing authorities; (ii) The rollback taxes are collected at closing by the Company, and (iii) The Company will pay the roll back taxes in the ordinary course of business. 11

13 Reorganization of P 20 and P 29 re: Tax Coverages Effective February 1, 2010 Places all rules relative to the treatment of taxes under one rule: P 20 (and repeals P 29). What does revised P 20 cover? (A) Insuring taxes for the current year; (B) Rollback taxes; and (C) Taxes not yet due and payable. Coverage Provided by Title Policy 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 year. Supplemental Taxes Supplemental taxes are covered by the title policy. So, the escrow officer must review the tax certificate for exemptions that might lead to supplemental taxes. If the escrow officer believes that taxes for prior years were paid with a disallowed exemption, she must blow the whistle and require that the supplemental taxes be paid in order to avoid a tax loss. 12

14 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. Interest and penalties will also be due. The same is true for missed improvements. Property Not Previously Taxed The assessor can go back 5 years and assess taxes on property that was omitted from the tax rolls; If we are made aware of this issue, either pay the assessed taxes per the Supplemental Tax Bill, or insert the following exception in the OTP: Loss, cost, or expense resulting from a portion of the property described on Schedule A, or improvements located thereon, not being assessed for ad valorem tax purposes for the years, and subsequent years. In the event of a conflict between this exception and Schedule B 5 of the policy, this exception shall control. Coverage Upon Request LP & ICB Only (Not OTP) P 20 (C) Amendment to add coverage: Company insures that standby fees, taxes and assessments by any taxing authority for the year are not yet due and payable. 13

15 Not Yet Due and Payable From October 1 through December 31 you must determine on a case by case basis what year to except from coverage and how to respond to a lender request for not yet due and payable language. Scenario #1 Tax certificate shows taxes paid through 2011 and no tax bills for 2012 taxes have been mailed by any taxing authority shown on the certificate: Except to 2012 taxes on the policies; At the request of the lender, you may add not yet due and payable language, completing the blank with the year Not Yet Due and Payable Scenario #2 Tax certificate shows taxes paid through 2011 and some but not all taxing authorities shown on the certificate have mailed tax bills for 2012: Except to 2012 on the policies; At the request of the lender, you may add not yet due and payable language, completing the blank with the year 2012 and modifying the language to indicate which taxes are not yet due in the following manner: Company insures that standby fees, taxes and assessments by any taxing authority for the year 2012 are not yet due and payable, as to [insert name of entity that has not mailed bills] only. Not Yet Due and Payable Scenario #3 Tax certificate shows amount due and owing for 2012 or amounts due are available for all taxing entities on the Central Appraisal District website: a. If you will collect and pay all 2012 taxes as part of the closing, or are holding an escrow deposit and indemnity with an agreement permitting you to pay the taxes before they are delinquent (according to P 20): (1) Except to 2013 on the policies; (2) According to P 20, you may not add not yet due and payable language because taxes for the year of the policy issuance are due. 14

16 Not Yet Due and Payable Scenario #3 Tax certificate shows amount due and owing for 2012 or amounts due are available for all taxing entities on the Central Appraisal District website: b. If you will not collect and pay the 2012 taxes: (1) Except to 2012 on the policies; (2) According to P 20, you may not add not yet due and payable language because taxes for the year of the policy issuance are due. Tax Certificates Tax Office Certificate Private Tax Company Certificate Review Certificate carefully! Legal description Street address Owner s Name Exemptions Assessed Value 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. The seller doesn t actually pay the taxes. 15

17 Prorations If the tax bills have not been issued, the proration should be based on the valuation and tax rate that were used for 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. Transfer of Tax Liens An owner may authorize another person to pay the ad valorem taxes due. A sworn document evidencing the authorization to be filed with tax collector. A tax receipt is issued stating that a third party has paid the taxes and that the tax lien has been transferred. Note: The collector must attach seal of office. 16

18 Transfer of Tax Liens Documents required to insure loan of Property Tax Lender: A certified copy of the document authorizing the 3 rd party to pay the taxes; and Tax receipt from the collector which must be recorded in the real property records. Transfer of Tax Liens The person to whom the lien is assigned, or a lender who refinances the tax lien, will have the same super priority lien priority as the collector, even though the lien is evidenced by a standard deed of trust form. So, this DOT is not wiped out by the foreclosure of a regular DOT on the property. Also, the foreclosure of the transferred lien will wipe out everything that a tax foreclosure sale would wipe out. Transfer of Tax Liens Property tax lenders make loans for the payment of delinquent property taxes. In return, they receive assignment or transfer of the ad valorem tax lien and a Deed of Trust from the borrower to secure repayment of the lien. Because of the super priority status of the ad valorem tax lien, some unscrupulous lenders have taken advantage of the system. 17

19 Transfer of Tax Liens In order to put a halt to this practice, legislation was enacted in 2007 to establish a code of restrictions and requirements for property tax lenders. As a result, the Texas Finance Commission was required to: Prescribe the form and content of an appropriate disclosure statement that the property tax lender must provide to the property owner before the tax lien transfer is executed, and Transfer of Tax Liens Adopt rules relating to the reasonableness of closing costs, fees and other charges property tax lenders may assess. Note: These rules are found in Texas Tax Code and and Texas Finance Code Chapter 351. Transfer of Tax Liens In addition, the legislation includes provisions that require the property tax lender to give notice of the tax lien transfer to any mortgage servicer and any holder of a recorded first lien on the property within 10 business days after the transfer of a property tax lien, and to record a copy of the tax lien transfer in the real property records of the county in which the property is located. 18

20 Transfer of Tax Liens Note: The change in law applies only to the transfer of an ad valorem tax lien that occurs on or after September 1, A transfer of an ad valorem tax lien prior to September 1, 2007, is covered by the law in effect at the time the transfer occurred. Transfer of Tax Liens A property tax lien that has been transferred to a property tax lender may be foreclosed either judicially or non judicially. However, before conducting a non judicial foreclosure, the property tax lender must obtain a court order. Any application for foreclosure must be served on the holder of any recorded pre existing first lien on the property. Transfer of Tax Liens After foreclosure of a transferred tax lien, beginning on the date the foreclosure deed is recorded, the person whose property was sold or the mortgage servicer of a prior recorded lien against the property may redeem the foreclosed property from the purchaser at the foreclosure sale or that purchaser s successor in interest. 2 years for homestead; ag use; or mineral interest, and 180 days for all other types of properties. 19

21 Federal Estate Tax Lien Attaches to all property of estate immediately upon death of decedent. No requirement for filing of lien. Lien is effective for 10 years. Procedural Rule P 11 (b)(9) tells us how to address these liens. Federal Estate Taxes A more detailed discussion of Estate Tax Liens can be found at pages of the paper. In 2012, the exemption from federal estate taxes stands at $5.12 million per person, and the top estate tax rate is 35 %. Under current law, in 2013 the estate tax rate will revert to the higher levels, unless new legislation is passed again changing the rate (55 %). Medicaid Estate Recovery Program Medicaid liens on the real property of deceased recipients have been available since the inception of the Medicaid program in However, federal law did not provide a means for enforcing the lien; instead, the assumption was that the individual states would enact laws to enforce and collect such liens. 20

22 Medicaid Estate Recovery Program On March 1, 2005, Texas enacted the Medicaid Estate Recovery Program ( MERP ) to enable the State to seek reimbursement against a deceased Medicaid recipient s estate, including homestead, for certain long term care services received by the deceased recipient from Medicaid after March 1, Medicaid Estate Recovery Program MERP creates lien on deceased Medicaid recipient s estate for reimbursement of certain long term care services received by the deceased recipient after the age of 55, and only if the recipient first applied for the services after March 1, MERP, continued The State will not file a claim in certain instances. Upon death of recipient, a request for info is sent to the estate so State can determine if they want to file a claim. Amount owed may be reduced by certain expenses. Contact underwriter for guidance. 21

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24 TAXES AND TAX LIENS TLTA Webinar September 18, 2012 PRESENTED BY: Lisa M. Beville VP, Agency Support Services and Regional Education Coordinator Fidelity National Title Group Southwest Agency Division 1445 Ross Avenue, Suite 4700 Dallas, Texas

25 TAXES AND TAX LIENS I. TEXAS PROPERTY TAXES IN GENERAL A. Introduction 1. Taxation of property in Texas is controlled by provisions found in the Texas Constitution and in the Texas Tax Code. 2. All property owned by individuals, corporations or any other legal entity that can hold legal title to property is subject to taxation. However, Governmental entities are not subject to taxation. 3. Taxing entities include the State of Texas, counties, and other governmental entities such as cities/towns, school districts, utility districts, etc. 4. Every year, the Appraisal District determines the value of each piece of property located within the boundaries of that taxing unit as of January 1 st. 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. Because taxes are based on the value of the property, real property taxes are commonly referred to as ad valorem taxes. 5. What constitutes real property that is subject to taxation in Texas? Examples are: land; improvements; minerals; standing timber; and other estates or interests in land such as easements and leasehold estates. 6. Examples of personal property that are subject to taxation are: furniture, fixtures, machinery, equipment and inventory. 7. Tax bills are sent out by the Tax Assessor/Collector s office on or about October 1 st of each year. Taxes become due and payable when the bill is received by the taxpayer. However, taxes are not considered delinquent until February 1 st of the following year. B. The Basics of Ad Valorem Tax Liens 1. Each year on January 1 st, a tax lien attaches to property to secure all taxes, penalties and interest that accrue on that property for that year. Lisa Beville Taxes and Tax Liens Page 2 of 23 Last revised: 08/28/2012

26 2. The tax lien attaches to property by operation of law, so no further action is required of the taxing entity to perfect the lien. There is no requirement that a notice of lien be recorded in the real property records. 3. All property taxes are the personal obligation of the owner of the property on January 1 st of the year the tax is imposed. Even if the owner sells the property later in the year, he is not relieved of the obligation to pay the tax. 4. Ad valorem tax liens remain in effect until the taxes are paid or until the lien is foreclosed by the taxing authority. 5. However, if real property taxes have been delinquent for more than twenty (20) years, a suit to enforce the personal obligation of the taxpayer may not be filed. 6. As a general rule, homesteads in Texas are protected from foreclosure. However, both the Texas Property Code and the Texas Constitution list certain liens that are valid, enforceable liens against the homestead. One of these valid liens is a lien for delinquent ad valorem taxes. Therefore, the fact that property is claimed as the taxpayer s homestead does not prevent foreclosure of the tax lien. C. Ad Valorem Lien Priority 1. An ad valorem tax lien takes priority over all other liens on and interests in the property, regardless of when the other liens or interests attached. Thus, it enjoys a super priority status. 2. Tax liens take priority over the homestead interest of the owner(s). 3. Tax liens assessed for different calendar years have the same priority. 4. Tax liens assessed by different taxing entities have the same priority. Therefore, it is important for a title company closing a real estate transaction to verify that tax statements have been obtained from every taxing entity that has jurisdiction to tax the subject property. II. EXEMPTIONS An exemption removes part of the value of the property from taxation and thus lowers the taxes. A. Taxpayer responsibilities with regard to Exemptions 1. To receive an exemption, the taxpayer must apply to the appraisal district that taxes the property. If the property is taxed by more than one Lisa Beville Taxes and Tax Liens Page 3 of 23 Last revised: 08/28/2012

27 appraisal district, an exemption application must be filed in each district office. 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 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 $15,000 exemption. 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. (1) The owner must be age 65 or older and may apply immediately following the 65th birthday. (2) May be continued by a surviving spouse who is 55 years of age or older on the date the qualifying spouse died. Lisa Beville Taxes and Tax Liens Page 4 of 23 Last revised: 08/28/2012

28 (3) 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 or Disability 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. NOTE: If a person who qualified for the over-65 exemption sells the property to a buyer who does not qualify for the exemption, the over-65 exemption will not apply and the buyer will be responsible for the full tax assessment without the benefit of the over-65 exemption. b) Tax ceiling for total school taxes (and possibly others) may be established at the amount of the taxes for the year of qualification. 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. 4. Disabled Veteran or Survivor Section Tax Code a) This exemption is not limited to the homestead of the veteran. It may be applied to any property owned by the veteran (or survivor) on January 1 of the tax year, but only one property may receive the exemption. b) Criteria: (1) The owner must be a veteran of the U.S. Armed Forces that the service branch or the Veteran s Administration has officially classified as disabled. The disability must be service related and the veteran must be a Texas resident. (2) A surviving spouse of a deceased veteran (who met the disability criteria before death or was killed in action) also qualifies if he/she is a Texas resident and has not remarried. (3) A child of a deceased disabled veteran may also qualify. Lisa Beville Taxes and Tax Liens Page 5 of 23 Last revised: 08/28/2012

29 C. New Law Effective re: Exemption Applications 1. Under a new law passed by the Texas legislature in 2011, homeowners who apply for a new property tax homestead exemption beginning September 1, 2011, must provide proof to the county appraisal district that they live in the house they claim as their principal residence. This includes applications for the residence homestead exemption, the over-65 exemption, the disability exemption, the disabled veteran s exemption, the extended exemption for a homeowner s surviving spouse and the manufactured home exemption. 2. Note: The new requirement does not apply to homeowners who already have homestead exemptions. It effects only new applications for exemptions sent to appraisal districts. 3. House Bill 252 amended Tax Code Section to require that an application for a residence homestead exemption must: (a) list each owner of the residence homestead and the interest of each owner; (b) state that the applicant does not claim an exemption under that section on another residence homestead in this state or claim a residence homestead exemption on a residence homestead outside this state; (c) state that each fact contained in the application is true; (d) include a copy of the applicant's driver's license or state-issued personal identification certificate and: (e) a copy of the applicant's vehicle registration receipt; or (f) if the applicant does not own a vehicle, an affidavit to that effect signed by the applicant and a copy of a utility bill for the property subject to the claimed exemption in the applicant s name. 4. The address on the driver s license and vehicle registration must match the address for which the homestead exemption is requested. Lisa Beville Taxes and Tax Liens Page 6 of 23 Last revised: 08/28/2012

30 D. Title Insurance Concern Supplemental Tax Bills 1. Several years ago, the tax assessor/collector of Dallas County began to systematically compare the grantors names in deeds with the death records of Dallas County. This review uncovered numerous instances in which property was improperly taxed at a reduced value because of one or more homestead exemptions on the property that were no longer applicable. Subsequently, other counties began to follow this practice. 2. Most of these cases involved situations where the land had been owned by a taxpayer who had legitimately claimed the exemption(s). But, upon the death of the taxpayer the homestead exemption(s) remained. When the property was eventually sold, the title company collected the taxes that were shown to be due, and issued a policy which insured that taxes had been paid. 3. The assessor/collector would later determine that the homestead exemption(s) should have been removed at the end of the year of the decedent s death, and would re-assess the land at a higher value thus increasing the taxes. The buyer (our insured) would eventually receive a supplemental tax bill for the additional amount of taxes that should have been paid and the Tax Code allows the assessor/ collector to re-assess taxes for up to five (5) preceding years. 4. Policy claims in this area led to changes in the promulgated tax exception, effective January 1, The new language clarifies that the standard tax exception in Schedule B, item 5 does not protect the title company from claims based on the retroactive removal of a Section homestead exemption(s). Note: See further discussion of policy coverages at Section V. A., below. III. VALUATION A. Real Property Valuations 1. All property must be appraised and taxed at its market value as of January 1 st. Market Value is defined as the price for which the property would sell when both the buyer and the seller desire the best price for the property and there is no pressure on either party to sell or purchase the property. 2. Land that is designated as agricultural use is appraised at its value based on the land s capacity to produce agricultural products. This is sometimes referred to as productivity value. 3. The appraised value for a taxpayer who qualifies his or her property for the homestead exemption in the preceding and current year may not increase Lisa Beville Taxes and Tax Liens Page 7 of 23 Last revised: 08/28/2012

31 more than 10 percent per year. The appraisal limitation first applies in the year after the homeowner qualifies for the homestead exemption. 4. The appraisal district must repeat its appraisal process for property at least once every three years. B. Agricultural Valuation Agricultural appraisal lowers the taxable value of the land because the land is appraised on its capacity to produce crops, livestock, or timber, rather than its value on the real estate market. 1. Land may qualify for productivity valuation if it qualifies under one of the two types of agricultural appraisal methods authorized by the Texas Constitution: Texas Constitution, Article VIII, Section 1-d ( Ag-Use ) or Section 1-d-1 ( Open Space ). 2. The Constitution contains specific requirements for qualifying for both the ag-use valuation and the open space valuation. 3. Rollback tax trigger. - If the ag-use or open space land is sold or diverted to nonagricultural use during a tax year, the land is subject to an additional rollback tax. The rollback tax is the difference between the taxes paid (or payable) under the 1-d or 1-d-1 valuation, and the amount of taxes that would have been paid under the higher, market value valuation, for the preceding three (3) years for ag-use land, and for the preceding five (5) years for open space land. 4. Tax lien. A tax lien attaches to the property immediately upon the sale or change in use to secure payment of any rollback taxes that may become due. The taxing entities do not have to wait until January 1 st of the next year to have a lien on the property for rollback taxes. This lien includes any interest and penalties that may accrue. However, any rollback taxes, interest and/or penalties are not assessed immediately, and cannot be collected for and/or paid until the bill for these rollback taxes has been sent to the property owner. 5. Title Insurance Concerns In sale transactions where the tax certificate shows that the property is currently being assessed and taxed under some alternate valuation method: Lisa Beville Taxes and Tax Liens Page 8 of 23 Last revised: 08/28/2012

32 a. If the Tax Assessor has not delivered bill for the rollback taxes, a title company has no authority to compute the taxes on its own, escrow the amount, and insure against the risk. Note: See further discussion of this issue at Section V. B., below. b. The tax collector has no legal authority to accept payment of rollback taxes until a final determination of the amount of taxes due has been made and a supplemental tax bill has been mailed. c. In 1995, the legislature enacted Sections and of the Texas Tax Code. These sections allow a lender to require that a borrower establish and maintain an escrow account to pay rollback taxes that may be assessed against ag-use land or openspace land.. IV. TAX BILLS AND PAYMENT OF TAXES A. Tax Bills 1. Taxing units usually mail their tax bills in October. 2. The tax bill is for the calendar year: January 1 December 31. B. Payment of Taxes 1. When taxes are paid, the tax collector must provide a receipt, which is evidence of payment of the taxes. 2. If the Appraisal Review Board (ARB) is still reviewing a protest, the taxpayer may make a conditional tax payment either last year s tax amount or the taxes due on the ARB order, whichever sum is less. Once the ARB sets a value, the tax collector will send either a supplemental tax bill or a tax refund. 3. If a taxpayer appeals the taxable value to district court, he or she must usually pay the taxes. 4. Taxpayers have no legal right to withhold taxes or to put taxes in escrow to protest government spending or for any other reason. 5. The deadline for paying the tax bill is January 31; however, taxing units must allow taxpayers at least 21 days to pay after the original bill is mailed. If bills are mailed after January 10, the delinquency date is postponed. Lisa Beville Taxes and Tax Liens Page 9 of 23 Last revised: 08/28/2012

33 C. Failure to Pay Taxes 1. Delinquent Taxes Taxes that remain unpaid on February 1 are considered delinquent. 2. Penalty and interest charges are added to the original amount. a) Regular penalty charges may be as high as 12 percent per month, depending on how long the tax remains unpaid. b) Interest will be charged at the rate of 1 percent per month, with no maximum. c) Private attorneys hired by taxing units to collect delinquent accounts can charge an additional penalty to cover their fees. 3. Delinquent Tax Lawsuit The tax collector s last resort is to take a delinquent taxpayer to court, in which case court costs will be added to the delinquent tax bill. a) Each person who owns taxable property on January 1 is liable for all taxes due on the property for that year. b) A person who owned taxable property on January 1 can be sued for delinquent taxes even if the property has been sold or transferred since then. 4. Tax Lien Each taxing unit holds a tax lien on each item of taxable property located within the boundaries of that taxing unit. a) The lien automatically attaches to property on January 1 of the tax year to secure payment of all taxes, penalties, and interest ultimately imposed for the year. b) The lien exists in favor of each taxing unit having power to tax the property. c) This tax lien gives the courts the power to foreclose on the lien and seize the property, even if its ownership has changed. 5. No Clear Title Until Taxes Are Paid In Full As a result of the tax lien, someone who purchases real estate cannot obtain a clear title until all the delinquent taxes owed on the property are paid in full. a) If you are buying a portion of a larger parcel of land, check the taxes on the larger parcel. b) You will not be able to clear a tax lien against your portion unless taxes on the whole are paid. c) If a tax suit has been filed, the taxes and costs of the suit must be paid, and the suit must be released of record. Lisa Beville Taxes and Tax Liens Page 10 of 23 Last revised: 08/28/2012

34 V. TAXES AND TITLE INSURANCE A. 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. Note: Since title policies insure only real property, not personal property, these policies only address taxes assessed against real property. 2. What is removed from coverage by the standard Schedule B exception? Here is the exception, broken down into segments: Standby fees, taxes and assessments by any taxing authority for the year and subsequent years, This segment is an exception to the taxes the title agent is unwilling to insure. The blank is completed with the first year they are unwilling to insure. For example, if the agent is confident that all taxes are paid through the year 2011, the blank is completed with Most underwriters do not permit insuring taxes on a piecemeal basis. That means that if some, but not all, of the 2011 taxes are paid the exception is to Only if all of the 2011 taxes are paid, should the exception be and subsequent taxes and assessments by any taxing authority for prior years due to change in land usage or ownership This segment is an exception to the consequences of rollback taxes which may be due for prior years because of lost eligibility for open space or agricultural valuation. This portion of the tax exception may be amended out of a Loan Policy or an Interim Binder, but not out of an Owner Policy (in accordance with Procedural Rule P-20). Because the lien to secure payment of the rollback taxes arises immediately, but the tax bill for these taxes won t be mailed to the taxpayer until a later date, this clause should not be deleted if the insured transaction may trigger the assessment of rollback taxes. Effective February 1, 2010, Procedural Rule P-20 was amended to add guidance on insuring against rollback taxes. See further discussion below.... 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, This segment 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 )... or because of improvements not assessed for a previous year. The last part tells the insured that they are covered with regard to taxes for prior years resulting from improvements that were not included in the appraised value of the property ( omitted improvements ). Lisa Beville Taxes and Tax Liens Page 11 of 23 Last revised: 08/28/2012

35 3. In addition, the following promulgated language may be added to the tax exception in a Loan Policy or an Interim Binder (in accordance with amended Procedural Rule P-20) to assure the lender that taxes for a specified year are not yet due. Company insures that standby fees, taxes and assessments by any taxing authority for the year are not yet due and payable. As we previously discussed, tax bills are mailed out on or about October 1 of each year, and become due and payable when the bill is received by the taxpayer. Therefore, this language cannot be added to a Loan Policy or an Interim Binder after the tax bills have been sent out, and until those taxes have been paid (from about October 1 until the agent is certain that all taxes, penalties and interest for the year have been paid). Agents have often been asked to add the not yet due and payable clause on a piecemeal basis providing the coverage as to some but not all of the taxing authorities, depending on which taxing authorities had mailed out their tax bills. In the past, there was no rule that allowed a title agent to comply with this request. However, a recent amendment to Procedural Rule P-20, effective February 1, 2010, will now allow us to do so. See further discussion of these piecemeal coverage, below. B. Reorganization of P-29 and Bulletin 153 into P-20 The Commissioner of Insurance issued his final adoption order for the 2008 Rule Making Hearing in January of This Order makes all rule changes effective February 1 st, One of the changes in the Order was a reorganization of the two Procedural Rules that provided for additional tax coverages in the Loan Policy, P-20 and P-29, into one rule, P-20. A copy of Revised Rule P-20, as found in the Commissioner s final order, is included on the next two pages of this paper. The amended P-20 clarifies when you can insure taxes as being paid for the current year. If the lender tells the title company that taxes for the current year have been paid from an escrow account, P-20 (b) allows the Loan Policy to insure taxes as paid for the current year if there is satisfactory evidence that the taxes for the current year have been paid by the lender from a Reserve/Escrow Account held by the lender. If the title company is not provided satisfactory evidence showing the taxes have been paid, then the title company may accept an indemnity from a responsible party together with a deposit of funds in an amount sufficient to pay the assessed taxes. If the title company has received an indemnity and a deposit of funds, the company shall have the right to pay the taxes according to the terms of the indemnity before they become delinquent. Or, upon receipt of satisfactory proof that taxes for the current year have been paid, the title company will pay the escrowed funds to the proper party, according to the terms of the agreement. If taxes for the current year have not been assessed by the taxing authorities, you cannot insure that such taxes are paid. Lisa Beville Taxes and Tax Liens Page 12 of 23 Last revised: 08/28/2012

36 Lisa Beville Taxes and Tax Liens Page 13 of 23 Last revised: 08/28/2012

37 Lisa Beville Taxes and Tax Liens Page 14 of 23 Last revised: 08/28/2012

38 C. Tax Certificates Because Title Insurance policies provide such broad coverage with regard to taxes, the title agent should carefully verify the status of all taxes and assessments against all property to be insured. Tax status can be verified by obtaining a Tax Certificate either directly from the Tax Assessor/Collector s office, or from a private, third-party tax service. 1. Tax Certificate from Taxing Authority Tax certificates are available for a charge from the Tax Assessor of the county in which the property is located. The tax certificate will describe the property, and will summarize the amount of taxes, penalties and interest due on the property. If the tax certificate erroneously states that there are no delinquent taxes, penalties or interest due, the buyer will purchase the property free and clear of the taxing unit s tax lien. However, the seller will remain personally liable for the taxes. Additionally, the buyer may have a claim under the Owner Policy if the policy insures that the taxes are current but the taxes actually remain unpaid. 2. Tax Certificate from Private Service Tax services provide a tax certificate, for a charge, that provides a description of the property and summarizes the amount of taxes, penalties and interest due. The tax service guarantees their report of the tax records as of the date of the certificate. So, if the buyer suffers a loss based on reliance on that tax certificate, the tax service company will usually reimburse the title agent for a tax claim paid under the title policy. However, if additional taxes are added to the tax roll after the date of the tax certificate such as for lost exemptions, omitted improvements, or loss of a special valuation the tax service is not liable and the title agent must suffer the loss. The title agent will look to the owner of the property at January 1 st for possible reimbursement. 3. Taxing Authority vs. Private Tax Service Why would a title insurance agent use a private tax service rather than the local taxing authority? It s usually a matter of timing. Tax services can usually deliver tax information immediately upon request to a title insurance agent, while the local Tax Assessor may take several days, a week, or longer to deliver an individual tax certificate. 4. What do you do when you receive the Certificate? Carefully review the Certificate to minimize losses. Lisa Beville Taxes and Tax Liens Page 15 of 23 Last revised: 08/28/2012

39 a) Legal description (1) Do you have a certificate or certificates for all of the land to be insured? (2) Does the certificate cover the entire legal description? (Not just the North ½ of Lot 1 if you are insuring all of Lot 1) (3) All information should agree with the legal description in the Commitment: Lot, block, addition name, section and/or phase for platted property; survey name, abstract number and amount of acreage covered for un-platted property. b) Street address (1) Situs on the tax certificate should match the physical address of the property to be insured. (2) Does the street address match the address on the contract and on the survey? c) Assessed owners should agree with the Commitment. d) Exemptions Is the property receiving special exemptions such as homestead, over-65, disability or disabled veteran? (1) If so does the current owner qualify, or is the exemption being carried over from a prior owner? (2) If the exemption is for the current owner, who is selling the property? Will the exemption be transferred to a new home? e) Assessed value (1) How does the assessed value compare to the contract price and title report? (2) The value should generally agree with the transaction you are closing. (3) Is the assessment based on market value or does the property receive an agricultural use exemption, indicating the possibility of rollback taxes? D. Proration of Current Year s Taxes 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. Lisa Beville Taxes and Tax Liens Page 16 of 23 Last revised: 08/28/2012