What is TIF and How Does it Affect Your Texas Property Taxes?

What Is TIF?

As a property owner, you have many details to keep track of to make sure your home is properly taken care of and paid for. For example, when you transition from a renter to a homeowner, you become responsible for multiple types of payments, including Texas property taxes.

The type and amount of property taxes you’ll pay depends on a variety of factors. One of the most important is where you live. Depending on your location, you might find yourself saddled with additional financial obligations in the form of special taxing districts

In some cases, these fees are affected by tax increment financing (TIF). While not explicitly a property tax of its own, TIF functions similarly, providing a host of benefits for homeowners in a specific area.

But what is TIF, how does it work, and what benefits does it provide?

What Is a TIF District?

TIF Meaning in Real Estate

A TIF fund or TIF district is a feature of Texas tax law that incentivizes investment in property in a variety of different neighborhoods and has a positive effect on local and state-wide economies.

TIF stands for tax increment financing. With this form of financing, a city can invest in redevelopment projects upfront and pay for them with the anticipated rise in property tax revenue from the resulting more valuable properties. This is called “bond financing” and is the most common form of TIF. In this case, the city bears the risk that the redevelopment won’t generate as much revenue as anticipated in order to entice developers in the private sector to take on the project.

Another option is for cities to pay developers as the higher tax revenue is generated over the course of the project, known as “pay as you go.” This is less common, as it requires developers to assume some of the risks and invest their own capital.

When TIF funds are collected in a certain neighborhood, the neighborhood becomes a TIRZ, or tax increment reinvestment zone. This means that everyone who owns property within the confines of the TIRZ will enjoy the benefits and advancements that the TIF funds are able to provide.

Some common benefits that property owners in a TIRZ can expect include investment in local infrastructure, development of local properties, and increases in property value. 

In order to create a TIF project and subsequently create a TIRZ, there will need to be a project plan in place that outlines the proposed improvements. There will also be a board of project management directors and a financing plan.

TIF Funds: How Does TIF Financing Work?

For the average property owner, TIF districts make an indirect impact, not a direct one. Owners don’t pay into a TIF fund or have TIF districts show up on their property tax bill like MUD taxes. Instead, they see the impact in rising property values, which then result in an increase in the property taxes they must pay.

It works like this: at the beginning of the project, the city looks at the current tax revenue that is paid to taxing entities within the TIRZ (school districts, hospitals, and the like) and “freezes” it at that base level. During the course of the project, property tax revenue will begin rising due to increased property values. All revenue above the “frozen” base level is dedicated to repaying the initial investment in the project. (Individual taxing units can choose to pay a smaller percentage of their tax increment into the TIF fund, but it defaults to 100%.)

Once the project is paid off and the TIF district expires, the “freeze” is removed, and all taxing entities within the TIRZ will have access to all of the newly increased revenue.

What is TIF and How Does It Work?

TIF doesn’t increase the tax rate; property owners pay more in property taxes because their property investment has become more valuable.

How Long Do TIF Districts Last?

Unlike property taxes, TIF- and TIRZ-funded projects have a set expiration date. TIF can be spread out over decades, often as many as 30 years. The lifespan depends on the individual TIF district, however. The city of Dallas, for example, posts all active Dallas TIF districts on the Dallas Economic Development site, showing TIF lifespans anywhere from 12 years to more than 30.

TIFs vs. PIDs

TIFs and PIDs can be easily confused because they have a similar purpose: neighborhood improvement. However, the difference lies in how the neighborhood improvement is paid for.

A PID, or public improvement district, is a special area of assessment created to cover project costs. This becomes a monetary assessment that homeowners within the district pay off directly. PID taxes are included in a Texas homeowner’s property tax bill, and they’re an additional tax paid on top of standard property taxes. The amount of the PID assessment any individual homeowner is responsible for can even be paid off up front if the homeowner chooses to do so.

TIFs, on the other hand, are created to incentivize developers to take on redevelopment and are paid off indirectly through the natural increase in property values and taxes.

Though the result of both funds is improved infrastructure and increased property value, TIF funds rely heavily on the improved property rates in order to see returns based on increased property taxes, while PIDs do not.

What Is a TIRZ?

What is a TIRZ? TIF vs. TIRZ

A TIRZ is the specific zone of properties from which increased property tax revenue is captured for TIF and which benefits from the redevelopment. A TIRZ can be created out of a variety of neighborhoods that have many different housing types, including both residential and commercial districts. However, they’re most commonly associated with commercial areas, as cities aren’t allowed to create a TIRZ if more than 30% of the properties in the zone are residential. (This doesn’t just mean that people live there; multi-family homes with more than five units, such as some condo buildings, are classified as commercial.)

If a county wants to create a new TIRZ, it will have to make sure that the Texas constitution allows it based on the region and how it relates to the constitution’s equal and uniform taxation requirement.

Usually, TIF funds and TIRZs are created by the city rather than the county, as the city’s only requirements are to hold a public hearing on the zone’s creation and present a financial plan for the fund.

However, in order to become a TIRZ, a neighborhood will have to show proof of structures that create economic liability for the housing zone. This could mean properties with unsafe conditions, faulty lot sizes, and a lack of adequate sidewalks and roads, among other features.

TIF-Funded Neighborhoods Put Property Value First

If you’re interested in investing in property, you already know that property value should be a major priority. Cities know this, too. When there’s an opportunity to revitalize an area that’s lagging behind where it could be, TIF allows cities to attract developers and increase the value of property investments for all homeowners in the area.

Ready to live your best life in Texas? Call The RealFX Group at (512) 956-7390 to contact an experienced local real estate agent who can help you discover the Texas home of your dreams.

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