Property Tax Shifts

Property Tax Shifts

Property Tax Shifts: California Prop 13 vs. Texas and the Property Tax Landscape

Property taxes are the second-largest residential tax expense for most homeowners—and among the most misunderstood in geographic arbitrage analysis. High-income earners who move from California to Texas specifically to eliminate income tax sometimes discover that Texas property taxes—among the highest in the country—partially or significantly offset the income tax savings, depending on the home value and how the comparison is structured.

Understanding how property taxes actually work in the most significant states for geographic arbitrage decisions, what protections homeowners receive, and how to model the complete tax comparison requires moving beyond headline rates to the actual bills that result from each state's specific assessment, exemption, and cap structure.

CALIFORNIA PROPOSITION 13: THE ASSESSMENT FREEZE

Passed by California voters in 1978, Proposition 13 established three permanent rules for residential property taxation:

Rate cap: Property tax cannot exceed 1% of the assessed value (plus approved local assessments and bonds, typically adding 0.2% to 0.5%).

Assessment cap: Assessed value can increase by no more than 2% per year, regardless of actual market value appreciation.

Reassessment trigger: Property is reassessed to current market value only upon a change in ownership or completion of new construction.

The combined effect over decades of ownership is dramatic. A California homeowner who purchased a home in 2000 for $400,000 has an assessed value today of approximately $600,000 (the original $400,000 growing at 2% per year for 24 years). The current market value of the property might be $1.8 million. The homeowner pays property tax on $600,000, not $1.8 million—a property tax bill of approximately $7,200 per year (at 1.2% effective rate) on a property worth $1.8 million.

This is the Prop 13 lock-in: longtime California homeowners pay effective property tax rates of 0.3% to 0.6% of actual market value—far below what the nominal rate would suggest.

Proposition 19 (2020): Modified Prop 13 to allow parents to transfer their Prop 13 assessment base to adult children, but only for a primary residence, and only to the extent the child uses it as their own primary residence. Investment properties and vacation homes no longer carry the low assessment base to the next generation—a significant change for estate planning in California.

TEXAS PROPERTY TAXES: HIGH RATES AND FEWER PROTECTIONS

Texas funds its state government without an income tax, relying heavily on property taxes and sales taxes for revenue. Texas property tax rates (the combined rate of county, city, school district, and special district levies) typically range from 1.5% to 2.5% of assessed value—among the highest in the country.

Texas homestead exemption and protections:

General homestead exemption: $100,000 off the assessed value of a primary residence for school district taxes (increased from $40,000 in 2023). This reduces the taxable assessed value by $100,000 before the school district rate applies.

Over-65 homestead exemption: Additional $10,000 off school district assessed value for homeowners aged 65+, plus a freeze on school district taxes (the school portion cannot increase after age 65, even if the home appreciates).

Assessment cap: Texas caps annual assessment increases at 10% per year. Unlike California's 2% cap, Texas's 10% cap allows much faster catch-up to market values. In a rapidly appreciating market (Texas experienced 30% to 40% price increases in some markets from 2020 to 2022), the 10% cap provides some lag but doesn't prevent assessed values from eventually reaching market value.

Texas property tax bills on specific home values:

$300,000 home in Austin (total rate approximately 1.9% after exemptions): $5,700/year $500,000 home in Austin: $9,500/year

$750,000 home in Dallas metro area (rate approximately 2.2%): $16,500/year

These are real, annual cash expenses that must be compared to state income tax savings when evaluating geographic arbitrage.

THE DIRECT COMPARISON: CALIFORNIA OWNER VS. TEXAS BUYER

Scenario A: A Californian who bought their home in 2005 for $500,000. Current market value: $1,500,000

Assessed value (2% cap for 19 years): $500,000 × (1.02)^19 ≈ $712,000

California property tax (1.2% effective): $8,544/year

The same person moves to Texas and buys a comparable $1,500,000 home: Texas property tax (approximately 1.7% in a desirable suburb after exemptions): $25,500/year

Moving from California to Texas costs this homeowner an additional $17,000/year in property taxes on a comparable home. If their income is $200,000/year, California income tax might be $15,000/year. The property tax increase exceeds the income tax savings—the move costs money on a net basis, assuming comparable home values.

Scenario B: A Californian who bought in 2020 for $800,000 (current market value $900,000).

Assessed value: approximately $867,000 (2 years at 2% cap)

California property tax (1.2%): $10,404/year

Same person moves to Texas, buys a $900,000 home: Texas property tax (1.7%): $15,300/year

The property tax increase ($4,900/year) is smaller, and with a higher income (say $400,000/year), California income tax might be $35,000/year. Moving to Texas saves $30,000 on net taxes.

The math depends critically on: how long the homeowner has been in their California home (longer = lower assessed value = higher California tax advantage), the income level generating the income tax savings, and the value of home purchased in Texas.

FLORIDA PROPERTY TAXES: THE BALANCED MIDDLE

Florida's property tax structure sits between California and Texas in both rate and protection:

Rates: Average effective property tax rates in Florida range from 0.75% to 1.5%, depending on county. Miami-Dade county effective rates hover around 1.0%; less urban counties may be 0.6% to 0.8%.

Homestead exemption: $50,000 off assessed value for primary residences (the first $25,000 applies to all taxes; the second $25,000 applies to all taxes except school district).

Save Our Homes assessment cap: Assessment increases for homestead properties are capped at 3% per year or the rate of inflation, whichever is lower. Florida's cap provides meaningful protection in appreciating markets but allows more catch-up than California's 2% cap.

Portability: Florida homeowners can transfer their accumulated Save Our Homes assessment savings (called "portability benefit") to a new home when they move within Florida—preserving years of accumulated protection when upgrading or downsizing.

Florida property tax example:

$750,000 home in Tampa metro area: Assessed value after homestead exemption: $700,000 Tampa metro effective rate (approximately 1.1%): $7,700/year

The same homeowner in California paying $8,544/year on a $1.5 million home would pay approximately $7,700/year in Florida on a $750,000 home—comparable property taxes with no income tax and a lower home value. This is the combination that makes Florida the most favorable comparison for most geographic arbitrage analysis.

NEVADA AND ARIZONA: THE RETIREMENT MARKET COMPARISONS

Nevada: No income tax, property taxes are among the lowest in the country (effective rate approximately 0.5% to 0.7%). Nevada's Abatement Cap limits annual property tax increases to the lesser of the Consumer Price Index or 3%. A $500,000 home in Las Vegas generates approximately $2,500 to $3,500 in annual property taxes. Nevada's low cost of living relative to California, combined with no income tax and low property taxes, produces the most favorable total tax environment—offset by the desert climate and more limited cultural and employment resources relative to coastal California.

Arizona: No inheritance or estate tax, income tax on a flat rate structure, property taxes averaging 0.5% to 0.7% effective rate. Scottsdale and Phoenix have attracted significant California retiree migration for precisely this combination.

THE TRANSFER OF ASSESSMENT: TIMING THE MOVE

For California homeowners whose Prop 13 assessment base is far below current market value, the property tax comparison at the current California location is favorable—but selling the California home triggers reassessment in California for the buyer, and starts the clock on a new assessment in the destination state.

The key questions for timing:

When is the California home sold? The tax savings from selling a California home with $1 million in embedded Prop 13 savings pass to the buyer, not the seller.

What is the basis and capital gain in the California home? California's primary residence exclusion ($250,000 for single filers, $500,000 for married) applies to California capital gains as well as federal. A large gain on a California home that exceeds the exclusion is taxed by California even if the seller has already established domicile in a new state—California taxes capital gains on California-sourced income. The home sale must close after genuine domicile is established in the new state, and California may still argue the gain is California-sourced income given the property is located there.

Model the complete tax picture: income taxes, property taxes, capital gains on home sale, sales taxes, and any state-specific deductions before concluding that any specific move produces the expected savings.

PROPERTY TAX PROJECTIONS IN RETIREMENT

For retirees on fixed or declining incomes, property taxes that increase faster than income create a specific affordability problem. This "property tax squeeze" affects retirees in high-appreciation markets where assessed values eventually catch up to market values after their state's cap allows.

Protections specifically designed for retirees:

Texas: Over-65 school tax freeze prevents school district taxes from increasing after age 65.

Florida: Portability benefit preserves accumulated Save Our Homes protection. The $50,000 homestead exemption reduces the taxable base.

Some states offer "circuit breaker" programs that reduce property taxes for retirees whose property tax burden exceeds a specified percentage of income. These programs vary significantly by state and are worth researching when evaluating retirement destinations.

Property taxes are a permanent, recurring expense that grows (in most states) over time. Modeling property tax trajectories over a 20- to 30-year retirement—not just the initial year's bill—is the discipline that produces accurate geographic arbitrage analysis.