Property Tax Deferral is high-cost option

This column first appeared in the San Antonio Express News on June 22, 2018.

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Dear Mr. Premack: I am trying to fully understand deferral of local property taxes. I understand pretty much all of it except the interest rate. I am over 65 and own my principal residence free and clear. The information I have from the state Comptroller’s site says, “annual 5% interest rate.” Is that correct? If my taxes are $5000 per year and I defer them for three years, what will I owe? Are there penalties? I think that I would owe $16,013. I’ll appreciate any numbers you can give me. – BP

The tax deferral to which you refer is authorized under section 33.06 of the Texas Tax Code. The law applies to homeowners who are age 65+ or who are younger yet legally disabled. It allows you to file a form that makes it legal to delay paying property taxes on your homestead.

When you file for deferral, you still owe the taxes. There are no penalties during the deferral, but interest still accrues annually. The Texas State Comptroller’s website does indeed say there is a 5% interest rate, but their form is outdated according to the Bexar Appraisal District. Instead, as of 2018, an 8% interest rate accrues on the tax arrearage.

My calculations indicate that your estimate of what you would owe is too low. If you defer $5,000 in taxes three times, in year 1 you owe interest on $5000, in year 2 you owe interest on $10,000 plus the accrued interest from year 1, and in year 3 you owe $15,000 plus the accrued interest from all prior years. At 5% the total due is estimated to be $16,588. At the 8% rate stated by the Bexar Appraisal District the total due is estimated at $17,631.

The added cost incurred by deferring your taxes is estimated at $2,631 for a three-year deferral at 8%. Every year you extend the deferral compounds the cost, since you pay interest on the unpaid interest accrued from prior years. If you defer the same taxes for six years instead of three, it is estimated you will owe $10,026 interest plus $30,000 in all the unpaid taxes.

While a proper deferral legally stops the tax authority from bringing a collection lawsuit they can still place a tax lien against your home. The taxes and interest will be due when you sell, or when you stop treating the home as your homestead (for instance, if you converted it to a rental property and moved elsewhere).

You say that you own your home free and clear, without a mortgage. That fact allows you to proceed with the legal deferral should you decide it is economical to do so. However, homeowners who do have a mortgage have, as part of the mortgage contract, usually waived their legal right to a tax deferral.

For someone else, a mortgage contract usually specifies that no other lien will be created with priority over the purchase lien. Typical mortgage contract wording says, “Borrower shall pay all taxes, assessments, charges, fines, and impositions attributable to the Property which can attain priority over this Security Instrument” and “If Borrower fails to perform this agreement … Lender may do whatever is reasonable or appropriate to protect Lender’s interest in the Property”.

The same restriction may apply to home equity loans and to reverse mortgages. If someone with a mortgage, an equity loan, or a reverse mortgage applies to defer property taxes causing the taxing authority to put a lien against the property, that homeowner will likely be breaching the mortgage contract. Just as failing to make your monthly house payment is a breach which can cause the lender to foreclose, creating a tax lien may be a breach which can cause the lender to foreclose.

Paul Premack is a Certified Elder Law Attorney with offices in San Antonio and Seattle, handling Wills and Trusts, Probate, and Business Entity issues. View past legal columns or submit free questions on legal issues via www.TexasEstateandProbate.com or www.Premack.com.

One thought on “Property Tax Deferral is high-cost option

  1. Great information as always, thank you. Just a couple of comments…

    The Property Code statutes online at https://statutes.capitol.texas.gov/Docs/TX/htm/TX.33.htm still list 5% interest, too. Don’t know if they are also out of date but my understanding was that they used to be 8% and they were lowered a couple of years back to 5% due to the low interest environment.

    Also, you mention in regards to lenders, “For someone else, a mortgage contract usually specifies that no other lien will be created with priority over the purchase lien.” I thought that every county taxing authority automatically creates a lien on every property each year so that they are first in line if taxes are not paid. Is that not the case? If it is the case, is that a different type of lien?

    I’m not asking for a legal opinion, but if a lender does not have that language regarding taxes in the contract terms, would you say that might create a problem for them enforcing an accelerated payment or foreclosure if someone with a mortgage availed themselves of the deferment?

    Thanks for all the fantastic information you share in each of your columns!

    Like

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