What is the difference between market value and appraised value?

Market value is what the appraisal district estimates the home would sell for; appraised value is the capped number on which your taxes are actually calculated. For a homestead, Section 23.23 limits the appraised value's annual growth to 10% plus new improvements, while market value can rise without that limit. When market value grows faster, the gap between the two is called the homestead cap loss, and it is not taxed in that year.

When does the cap take effect?

Under Section 23.23(c), the limitation takes effect on January 1 of the tax year following the first year the owner qualifies the property for the residence homestead exemption. So a home bought and homesteaded this year is generally appraised at market value for the first year, and the 10% cap begins the next year. It expires on January 1 of the first year that neither the owner nor the owner's spouse or surviving spouse qualifies for the exemption.

Do home improvements affect the cap?

Yes. A new improvement — an addition made after the last appraisal that raises market value, like a room addition, pool, or detached garage — is added to the appraised value at full market value under Section 23.23(e), and can raise the tax base beyond the 10% ceiling in the year it is completed. But ordinary repairs and maintenance, such as a new roof or repainting, are expressly excluded and do not lift the cap.

What happens after a fire or storm rebuild?

Under Section 23.23(f), a replacement structure for one rendered uninhabitable or unusable by a casualty or by wind or water damage is not treated as a new improvement. That means rebuilding a home destroyed by a fire, hurricane, or flood does not count as a new improvement that would lift the cap, protecting disaster-affected owners from a tax spike. This is distinct from a voluntary addition, which is a new improvement added at full value.

Is the cap the same as the homestead exemption?

No. The homestead exemption reduces the taxable value of the home by a set amount, lowering the tax base directly. The Section 23.23 cap is separate: it limits how fast the appraised value can grow year to year. A homeowner benefits from both — the exemption reduces the value, and the cap slows its annual increase. The cap only applies because the property has the homestead exemption, so the two work together but do different things.

Texas Homestead Appraisal Cap: Tax Code 23.23 (10%)

TL;DR

Texas caps how fast the taxable value of a homesteaded home can rise, and that cap is set by Section 23.23 of the Texas Tax Code. Once a property qualifies for a residence homestead exemption, the appraisal district may increase its appraised value each year by no more than 10% over the prior year's appraised value, plus the market value of any new improvements. In statutory terms, the new appraised value cannot exceed the lesser of the property's market value or the sum of last year's appraised value, 10% of that value, and the value of new improvements. This is why a Texas homeowner often sees two different numbers on the appraisal notice: a market value that can jump sharply in a hot market, and a capped appraised value that climbs more slowly. The difference between them is the homestead cap loss. The cap applies only to the appraised value used for taxation, not to market value, and only to a residence homestead. It takes effect on January 1 of the tax year after the owner first qualifies for the homestead exemption and expires when neither the owner nor a spouse qualifies. New improvements — additions that raise market value — are added at full value, but ordinary repairs and maintenance are not treated as new improvements.

What the homestead cap does

The residence homestead appraisal cap protects homeowners from being taxed on rapid market-value increases. In a rising market, the market value an appraisal district assigns to a home can climb quickly, and without a limit, the property-tax bill would climb just as fast. Section 23.23 slows that by capping the annual increase in the appraised — that is, taxable — value at 10%, no matter how much the market value rose. The homeowner is still taxed, but on a value that grows gradually rather than in sudden jumps, which makes tax bills more predictable and helps long-term owners stay in their homes.

The cap is specific to the appraised value, and understanding that distinction is essential. Market value is what the district estimates the home would sell for; appraised value is the number, limited by the cap, on which taxes are calculated. When the market value rises faster than 10%, the two diverge, and the gap is recorded as the homestead cap loss. The cap works alongside the underlying homestead exemption that reduces taxable value in the first place, covered in our guide to the residence homestead exemption.

How the 10% limit is calculated

Section 23.23(a) sets the ceiling as the lesser of two figures. The first is the property's market value for the most recent tax year the district determined it. The second is the sum of three components: the prior year's appraised value, 10% of that prior appraised value, and the market value of all new improvements made to the property. In practice, this means the appraised value can rise by at most 10% per year, plus whatever new improvements add. If a home was appraised at $300,000 last year and made no improvements, the most it can be appraised at this year is $330,000, even if its market value jumped to $380,000 — the remaining $50,000 is the cap loss and is not taxed this year.

The cap does not apply until the year after the homestead exemption is granted. Under Section 23.23(c), the limitation takes effect on January 1 of the tax year following the first year the owner qualifies the property for the exemption, and it expires on January 1 of the first year that neither the owner nor the owner's spouse or surviving spouse qualifies. That timing detail matters: a newly purchased home is generally appraised at market value for the first year, and the cap begins the following year. A separate provision, Section 23.231, applies a similar circuit-breaker limit to certain non-homestead property, but the 10% homestead cap under Section 23.23 is the one tied to the residence homestead. Homeowners who believe their appraised value is wrong can challenge it, which connects to our guide to the property tax appraisal protest.

New improvements and exclusions

The one thing that can push appraised value up by more than 10% is a new improvement. Under Section 23.23(e), a new improvement is an addition made after the most recent appraisal that increases the property's market value and was not included in the prior year's appraised value — for example, adding a room, a pool, or a detached garage. New improvements are added to the capped value at their full market value, so a major addition can raise the tax base beyond the 10% ceiling in the year it is completed.

Crucially, ordinary repairs and maintenance are not new improvements. Section 23.23(e) expressly excludes repairs to or ordinary maintenance of an existing structure, so replacing a roof, repainting, or fixing a foundation does not count as a new improvement and does not lift the cap. Section 23.23(f) adds another exclusion: a replacement structure for one rendered uninhabitable or unusable by a casualty or by wind or water damage is not treated as a new improvement, protecting owners who rebuild after a disaster. These distinctions — addition versus repair, rebuild versus improvement — are exactly what exam questions probe. To gauge how property-tax topics appear on the exam, our guide to the Texas exam passing score explains how these questions are weighted.

Frequently Asked Questions

How much can my Texas homestead's appraised value increase each year?: Under Tax Code Section 23.23, no more than 10% over the prior year's appraised value, plus the market value of any new improvements. The new appraised value is the lesser of the property's market value or the sum of last year's appraised value, 10% of that value, and new improvements. So even if market value jumps 25%, the taxable appraised value rises at most 10% (absent new improvements). The cap applies only to a residence homestead.
What is the difference between market value and appraised value?: Market value is what the appraisal district estimates the home would sell for; appraised value is the capped number on which your taxes are actually calculated. For a homestead, Section 23.23 limits the appraised value's annual growth to 10% plus new improvements, while market value can rise without that limit. When market value grows faster, the gap between the two is called the homestead cap loss, and it is not taxed in that year.
When does the cap take effect?: Under Section 23.23(c), the limitation takes effect on January 1 of the tax year following the first year the owner qualifies the property for the residence homestead exemption. So a home bought and homesteaded this year is generally appraised at market value for the first year, and the 10% cap begins the next year. It expires on January 1 of the first year that neither the owner nor the owner's spouse or surviving spouse qualifies for the exemption.
Do home improvements affect the cap?: Yes. A new improvement — an addition made after the last appraisal that raises market value, like a room addition, pool, or detached garage — is added to the appraised value at full market value under Section 23.23(e), and can raise the tax base beyond the 10% ceiling in the year it is completed. But ordinary repairs and maintenance, such as a new roof or repainting, are expressly excluded and do not lift the cap.
What happens after a fire or storm rebuild?: Under Section 23.23(f), a replacement structure for one rendered uninhabitable or unusable by a casualty or by wind or water damage is not treated as a new improvement. That means rebuilding a home destroyed by a fire, hurricane, or flood does not count as a new improvement that would lift the cap, protecting disaster-affected owners from a tax spike. This is distinct from a voluntary addition, which is a new improvement added at full value.
Is the cap the same as the homestead exemption?: No. The homestead exemption reduces the taxable value of the home by a set amount, lowering the tax base directly. The Section 23.23 cap is separate: it limits how fast the appraised value can grow year to year. A homeowner benefits from both — the exemption reduces the value, and the cap slows its annual increase. The cap only applies because the property has the homestead exemption, so the two work together but do different things.

Bottom Line

Texas Tax Code Section 23.23 caps the annual increase in a residence homestead's appraised value at 10% over the prior year, plus the market value of new improvements — the appraised value cannot exceed the lesser of market value or that capped sum. This limits taxable value, not market value, so homeowners often see a lower appraised value and a higher market value on the same notice, with the difference recorded as homestead cap loss. The cap takes effect January 1 of the year after the homestead exemption is first granted and expires when neither owner nor spouse qualifies. New improvements like additions are added at full value, but ordinary repairs, maintenance, and casualty rebuilds are excluded and do not lift the cap. For related topics, see our guides to the residence homestead exemption, the appraisal protest, and the Texas exam passing score.

Source: Texas Tax Code § 23.23 (limitation on appraised value of residence homestead). Tax Code § 23.23 (Texas Public Law) · Tax Code § 23.23 (FindLaw) · Valuing Property (Texas Comptroller)