Today we want to clarify a little known tax or assessment that can be costly if you aren't informed. Have you ever considered how communities are financed and built if they don't have existing infrastructure as suburban sprawls? This question should be top of mind to a buyer that wants to get it right when it comes to budgeting your monthly payments. We’re going to break down what a MUD and PID district is and what to be on the lookout for when home shopping. Be aware these details will be specific to Texas, and the disclosure rules have just changed. Financial surprises are not fun and with these becoming more common we want you to be educated and prepared.
What's the Purpose of These Tax Districts?
When there isn't enough commercial or residential tax activity, such as in a more rural area to support the infrastructure and creation of a brand new development, a whole lot of homes and a whole lot of people, commonly a MUD or a PID, are created here in Texas. They're to provide water, sewage, drainage, streets, sidewalks, parks, all the things we take for granted, but really love when we have and the maintenance of those things. They're essentially financing tools for improvement projects; that can be a brand new community or when we need to add something additional to the community. Both of those are income tax deductions, because they're viewed as additional property taxes. The easiest way to think about them is that they are additional property taxes that you'll need to pay off if you live in one of those districts.
Are these Districts Common?
In the state of Texas, there are more than 1,200 MUD districts and currently 65% of those are in Huston. Huston has so many, because it does not have zoning laws so they need people to create these projects to give residential infrastructure. Now there are some instances where a MUD is within the city limit and it’s going to have a double tax burden; meaning you’ll be paying city and MUD or PID taxes on that property. Dallas has fewer of these districts and in those areas a MUD essentially replaces the city tax. For example Lake Highlands at the Lake Highlands Town Center, where Daily Wheely development is in a PID. A MUD essentially replaces the city tax in a lot of areas for Dallas. Now let’s break down the nitty gritty of these districts.
What is a MUD District?
Let's start with the one that is actually a tax and that is a MUD. Mud stands for Municipal Utility District. A MUD will have a varied tax rate and will show up on your tax record as an additional tax line. It's a special district within an independent governing board separate from the county or city. These tax rates can change every year based on old or new debt, and they're typically paid each month by the homeowners. Since this is not controlled by the city it’s important to have good trust in your independent governing board, their decisions, and clarity on their timelines. They could always add new things based on what they feel like the community needs or the tax rate could go down. This independent board would vote on projects that they want to do or that the tax rate needs to decrease, because they're paying off debt; all of which is assessed differently year to year.
What is a PID District?
PID stands for Planned Improvement District and it has a fixed assessment rate. This is very different from the MUD, in that when a PID is created you know the timeline, exact assessment rate, and it will not change. It's much more clear how long and what you will be paying for. It's typically assessed yearly like an HOA fee would be and is a special district that's actually operated by your city council! These are the people that you voted into your city council. Even though it's operated by the City Council, that money is for sure coming back to that specific district, neighborhood, and community. Unlike a MUD these districts can work on a wide range of projects such as public safety, security, and affordable housing.
Where Are We Seeing These Districts?
Typically, we'll see PIDs in rural locations on the outskirts of the metroplex. These growing towns do not have enough infrastructure for a developer to come build thousands or even hundreds of homes. That is when a tool like this will be put into place. An easy example is a huge one is going to be Salina in North Texas. It's growing exponentially and is planned to have almost 400,000 residents soon. So you may hear people talk about how taxes are crazy in that area, but it's because they are in one of those PID districts. You may live to see the day where you don't have to pay that tax anymore, but it's helpful to understand the details of this and what it is really going to mean for your budget and for your monthly payment.
Why Does it Apply to Homeowners?
We're here to tell you that there are now new rules in the state of Texas as far as the real estate transaction is concerned on the notification of these special districts. In the past, you really needed to have an experienced agent who knew about these districts so that you didn't have any surprises when it came to payments, but as of this year sellers are now required to clarify upfront if the property is in a MUD or PID district; that way you aren’t financially surprised in the home buying process. The seller is required to give you a specific notice if it’s a MUD and if it's in a PID there's an actual addendum to the contract. I would expect that we'll see this evolve a little bit over the next couple of years as people actually use this, but I think just the act of disclosure and the intent is going to be major progress for buyers in this market.
Should I Buy in a MUD or PID District?
Whole cities are being developed within these districts so it's going to be a very common tool that we're going to see in the near and probably more longer term future. If you have an option, I think a PID is more straightforward and it has more local city oversight, but you're typically not going to have a choice. All of this is to say you need to be aware of what each of these means for you financially and what that commitment is going to be. Knowledge is power!
It’s Important to Be Informed
When it comes to these districts It’s much more about awareness than choosing at the end of the day. We do not expect you after what you’re learned today you’ll become a pro on MUDS and PIDS, because they are very confusing! In fact, we expect it to be as clear as mud. Really what you need to know is that it’s a thing your agent is going to guide you through. It’s good to be informed, ask questions, and know that it's out there. Real estate is ever evolving, and truly, we consider it an honor to keep you up to date. If you're home shopping in North Texas, don't worry, we've got you covered. As always, reach out if we can help you or your loved ones find the home of your dreams. We will take great care of them!
Until Next Time,
Brianna & Keelie