New construction in Texas is taxable in two separate ways. The materials that go into the structure are subject to the state’s 6.25 percent sales tax (plus local tax up to a combined 8.25 percent), and once the building exists it becomes taxable real property that the local appraisal district values every January 1. How much you actually pay depends on how your construction contract is written, what type of property you’re building, and which exemptions apply to you.
Sales Tax on the Build: How Your Contract Structures What You Pay
Under Texas Administrative Code Rule 3.291, the way your contract is written changes who pays sales tax and how visibly.1Cornell Law School. Texas Code 34 Tex. Admin. Code 3.291 – Contractors
A separated contract splits the price into two lines: one for incorporated materials, one for labor. The contractor buys the materials tax-free with a resale certificate and then charges you sales tax on the materials portion. Labor on new construction stays untaxed. You see the tax as its own line item on your bill.
A lump-sum contract bundles materials and labor into a single price. The contractor is treated as the final consumer of the materials and pays sales tax when buying them from suppliers, then rolls that cost into the total. You don’t see a separate sales tax charge, and the contractor is not allowed to collect anything labeled as sales tax on a lump-sum job.1Cornell Law School. Texas Code 34 Tex. Admin. Code 3.291 – Contractors
Either way, tax gets paid on materials. The difference is whether it’s calculated on what the contractor paid the supplier or on what the contractor charges you.
When Labor Becomes Taxable: New Construction vs. Remodeling
Labor on new construction is not taxable, whether the project is a house or a commercial building. The rules shift once the work is classified as remodeling instead of new construction.
Residential remodeling labor is also not taxable. Under a separated contract, you pay sales tax on the materials and nothing on the labor.2Texas Comptroller of Public Accounts. Real Property Repair and Remodeling
Nonresidential remodeling is the expensive category. When you repair, rebuild, upgrade, or replace parts of a commercial structure, the entire charge is taxable, materials and labor together. The contractor collects the 6.25 percent state tax plus any applicable local tax, up to a combined 8.25 percent, on the whole bill.2Texas Comptroller of Public Accounts. Real Property Repair and Remodeling3Texas Comptroller of Public Accounts. Local Sales and Use Tax Frequently Asked Questions
The line between the two is not always clean. An addition to a commercial building can be classified either way, and misclassification is a common audit issue. If you’re adding onto an existing structure rather than building from scratch, confirm in writing how your contractor is treating the job for tax purposes.
Property Tax Once the Structure Exists
All real property in Texas is taxable unless a specific exemption applies.4State of Texas. Tax Code Chapter 11 – Taxable Property and Exemptions Once a structure goes up, the local Central Appraisal District treats it as a taxable improvement attached to the land. Building permits and utility connections are how the district usually finds out.
Value is set as of January 1 each year. If your building is finished after January 1, it won’t appear on the appraisal roll until the following January 1, though it counts as new property value in that next year’s tax rate calculations.5State of Texas. Tax Code Chapter 26
For new construction, appraisal districts usually rely on the cost approach: land value plus current construction cost of the improvements, minus depreciation. A brand-new building has little or no depreciation, so the appraised value often lands close to total construction cost. The assessment covers the whole structure, including integrated systems like HVAC and plumbing.6Texas Comptroller of Public Accounts. Valuing Property
How Partially Completed Buildings Get Valued
Texas Tax Code Section 23.01 requires property to be appraised based on its condition as of January 1.7State of Texas. Texas Tax Code Section 23.01 – Appraisals Generally A half-finished building is not taxed as though it’s finished. Appraisers estimate the percentage of completion and apply it to the projected finished value.
If a home expected to be worth $500,000 when finished is roughly 40 percent complete on January 1 (say, slab, framing, and roof decking done), the improvement carries an assessed value of about $200,000 for that year, plus the land value underneath.
The January 1 snapshot creates a real strategic point. A project that pushes hard in December will show a higher percentage of completion than the same project that reaches that stage in February. Photos and dated records of the site around New Year’s give you evidence if you later think the district overestimated your progress.
Homestead Exemption for a New Primary Residence
If the new construction is your primary home, the homestead exemption is the biggest property tax break available to you. School districts must exempt $140,000 of the appraised value of a residence homestead. On a new home appraised at $400,000, that takes $140,000 off the value used for school district taxes.8Texas Comptroller of Public Accounts. Property Tax Exemptions
Other taxing units can adopt a local option homestead exemption of up to 20 percent of appraised value, with a minimum of $5,000. Owners who are 65 or older or disabled receive an additional $60,000 school district exemption on top of the base $140,000.8Texas Comptroller of Public Accounts. Property Tax Exemptions
You can’t claim the exemption until you actually occupy the home as your principal residence. Because January 1 controls the appraisal year, moving in by December 31 lets you apply for the exemption for that tax year. Move in on January 2 and you wait another year.
Rollback Taxes When You Build on Agricultural Land
Building on land that carries an agricultural or open-space valuation triggers rollback taxes, and the bill can be large. Qualifying agricultural land is taxed on its productivity value rather than market value, which is often a small fraction of what the land would sell for. Starting construction changes the land’s use, and the county recaptures the tax difference.
Under Texas Tax Code Section 23.46 for agricultural-use land and Section 23.55 for open-space land, the rollback covers five years of additional taxes plus interest. For each of those years, the additional tax equals the difference between what was paid under the agricultural valuation and what would have been owed at full market value, with interest running from each year’s original due date. On a few acres near a growing metro, the combined bill can reach tens of thousands of dollars. Factor it into the budget before you buy raw land with an ag exemption to build on.
Protesting the Appraised Value on a New Build
New construction is one of the most protestable categories in the property tax system. Districts often peg values at or above total construction cost, but that number can include change orders, custom finishes that don’t return their cost in market value, and delay-driven labor expense that a buyer wouldn’t pay for.
The deadline to file a protest is May 15, or 30 days after the appraisal district delivers your Notice of Appraised Value, whichever is later.9Texas Comptroller of Public Accounts. Homeowners Protest Guide Most districts offer an informal meeting with an appraiser first, and many disputes end there. If not, you can request a hearing before the Appraisal Review Board.
For the hearing, pull together your actual contract price, itemized costs, and sales of comparable new homes in your area. The appraisal district has to give you access to the data and formulas it used at least 14 days before the hearing. You present first, both sides can cross-examine, and the board issues a written determination by certified mail. The strongest evidence for a new build is usually a side-by-side of your true costs, stripped of items that don’t add market value, against the district’s number.
What Your Construction Costs Do for a Future Sale
Every dollar you spend on the build feeds into your cost basis, which sets how much taxable gain you’ll owe when you eventually sell. The IRS lets you include the cost of land, labor, materials, architect’s fees, building permits, inspection fees, contractor payments, and rental equipment. Settlement costs like title insurance, transfer taxes, recording fees, and survey charges also count.10Internal Revenue Service. Publication 551 – Basis of Assets
Site improvements that add value (extending utility lines, paving a driveway, paying impact fees) go into basis as well. What you cannot include is the value of your own labor. Weekends spent framing walls yourself add zero to basis, even though they lowered what you paid a contractor.
A higher basis means less taxable gain later. If the home is your primary residence and you’ve owned and lived in it for at least two of the five years before selling, you can exclude up to $250,000 of gain, or $500,000 if married filing jointly, under the Section 121 exclusion.11Internal Revenue Service. Selling Your Home For a newly built home, the two-year clock starts when you move in, not when construction begins. Sell earlier and you lose the full exclusion, though a partial exclusion may apply for a job relocation, health reason, or other unforeseeable event.