Do basements count toward floor area in Austin?

Both conditions, not either

§3.3.3.B is more demanding than it first looks. The 2008 amendment added two tests that are easy to miss:

1. The habitable portion does not extend beyond the first-storey footprint, and is below natural or finished grade, whichever is lower;
2. Where it must be below natural grade, it is surrounded by natural grade for at least 50% of its perimeter wall area;
3. The finished floor of the first storey is not more than three feet above the average elevation at the intersections of the minimum front yard setback line and the side property lines.

"Whichever is lower" is the important phrase. You cannot create a basement by berming earth against a wall — if finished grade is higher than natural grade, the code measures from natural grade.

The three-foot rule is about the storey above, not the basement

Condition 2 does not measure the basement at all. It measures how high the first floor sits above a fixed reference: the average elevation at the two points where the minimum front yard setback line meets the side property lines.

The logic is to stop a "basement" that is really a raised ground floor. If you lift the house so the lower level is mostly above ground with windows and walk-out access, the first-storey floor climbs past three feet and the exemption disappears — regardless of what you call the lower level.

So the design question is not "how deep is the basement?" It is "how high is the first floor?"

Why you see few basements in Austin

Austin has limestone close to the surface across much of the central city, and excavation costs reflect that. The exemption is genuinely valuable — below-grade space that does not count against your allowance is the cheapest square footage in the code — but the construction cost frequently exceeds what the same money buys above ground.

Where it does pay off is on sloping lots, which Central Austin has plenty of. A slope lets you get usable below-grade space without excavating the entire footprint. The catch is that the same slope makes condition 2 harder to satisfy, because the reference elevation is an average across the front of the lot.