Tax issues are among the most frequent title claims that arise during real estate closings. After you have negotiated the purchase price, secured financing, and prepared to close, a tax problem can suddenly complicate or even jeopardize your transaction. Understanding these potential issues is crucial for protecting your investment.
Retain Your Tax Certificate
Texas law requires title companies to order a tax certificate from a third party during the closing process. This document shows the current status of tax payments on the property and any active exemptions, such as homestead exemptions.
You have the right to request a copy of this tax certificate. While title companies rarely offer it upfront, you should always ask for it to protect your interests.
Common Challenges
Unfortunately, three major tax issues can create serious complications for buyers and often result in surprise bills months or even years after closing.
Challenge #1: The Over-65 Exemption Trap
Texas provides substantial tax discounts to property owners over 65 who apply for this exemption. However, the exemption ends immediately when the property owner passes away.
The problem is that tax jurisdictions have no way of knowing about the death until documents are filed of record. As a result, heirs often continue to own the property (sometimes for years) while paying the artificially low over-65 tax rate, even though they are not entitled to it.
When the property is eventually sold and the deed is recorded, the tax jurisdiction discovers the original owner’s date of death through the affidavit of heirship or probate. They then reassess the property back to that date and send the new buyer a bill for the difference.
I had a case in which one investor purchased a property but the title agent failed to recognize this issue. Nine months later, when attempting to sell the rehabbed property, she discovered she owed an additional $4,000 in back taxes. While a title insurance claim eventually recovered the money, the process was difficult and time-consuming.
When an over-65 seller sells to an under-65 buyer, there is also a question about how to prorate taxes at closing. Should you use the lower exempted rate or the higher standard rate? This can create a “tug” between buyer and seller interests.
Challenge #2: New Construction Tax Surprises
When you purchase a newly constructed home, the prior year’s taxes are based only on the lot value rather than on the improved property value. This creates a significant proration problem.
If closing occurs in the first nine months of the year, current year taxes are not yet known because they are not determined until October. Tax prorations must be based on the prior year’s artificially low lot-only value.
The buyer takes a financial hit from the proration because they will eventually pay taxes based on the much higher improved property value, while the seller benefits from the lower proration calculation.
Challenge #3: Agricultural Exemption Pitfalls
Agricultural exemptions provide extremely low tax rates while the property maintains agricultural use. This is particularly common in commercial real estate transactions.
When a commercial buyer purchases the property and changes its usage, however, the agricultural exemption ends. Tax jurisdictions can then bill retroactively for up to five years at full property value.
The tax bill is not immediate; but when it arrives months later, it can represent a substantial unexpected cost that significantly impacts your investment returns.
The Next Step
As the buyer in these situations, you MUST ensure your settlement agent is experienced and knowledgeable about these tax issues!
After consulting with your real estate attorney, I suggest the following steps:
1. Request and review the tax certificate carefully before closing.
2. Ask specific questions about any exemptions affecting the property.
3. Verify the settlement agent’s experience with complex tax situations.
4. For probate/heirship properties: Ensure the title agent recognizes over-65 exemption issues and calculates back taxes before closing.
5. For new construction: Understand that tax prorations may be based on lot value only and budget accordingly.
6. For commercial properties: Investigate any agricultural exemptions and factor potential retroactive tax bills into your purchase price
Be Proactive
The law is very specific about how tax issues should be handled at closing, so we recommend that you consult with your real estate attorney to make sure the correct process is followed.
Working with an experienced, knowledgeable settlement agent is crucial. Title insurance can help recover costs when agents make errors, but prevention is always better than correction. You need to make sure that you work with a professional settlement agent who is experienced in these areas. Otherwise, these tax issues may create significant complications later.
Gaylene Rogers Lonergan
Board Certified Residential and Commercial Real Estate Attorney
Lonergan Law Firm, PLLC
12801 North Central Expressway, Suite 150, Dallas, Texas 75243
214-503-7509 | lonerganlaw.com | grogers@lonerganlaw.com
Lonergan Law Firm PLLC | Founded 2000 | Ongoing Legal and Title Practice
© Gaylene Rogers Lonergan and Lonergan Law Firm, PLLC, 2026. All rights reserved. This article is provided for educational reasons exclusively and is not meant to be construed as legal advice. The Lonergan Law Firm, PLLC, will represent you only after being retained and that agreement is made in writing.
