It's calculated on what the tax appraiser comes up with as the "market value" of your home. This can be much different than purchase price. If your purchase price is lower, then you might take your contract to them and see if they will lower to the purchase price. They may do this the first year if the home was not a foreclosure. If it was a foreclosure you may have to fight harder to get them to reduce it to the purchase price and prove the purchase price was indeed market value. If your purchase price was above the tax value then you might get a break for this year, but could have taxes go up for next year.

Kathy.
The appraisal district must repeat its appraisal process for property at least once every three years.

To save time and money, the appraisal district uses mass appraisal to appraise large numbers of properties. In a mass appraisal, the district first collects detailed descriptions of each taxable property in the district. It then classifies properties according to a variety of factors, such as size, use and construction type. Using data from recent property sales, the district appraises the value of typical properties in each class. Taking into account differences such as age or location, the district uses “typical” property values to appraise all the properties in each class. The appraisal district may use three common methods to value property: the market, income and cost approaches.

The market approach is most often used and simply asks, “What are properties similar to this property selling for?” The value of your home is an estimate of the price your home would sell for on Jan. 1. The appraisal district compares your home to similar homes that have sold recently and determines your home’s value.

Other methods are used to appraise types of properties that don’t often sell, such as utility companies and oil leases. The income approach asks, “What would an investor pay in anticipation of future income from the property?” The cost approach asks, “How much would it cost to replace the property with one of equal utility?”
To Read more go to this site http://www.window.state.tx.us/taxinfo/proptax/ Hope this helps.