Ad Valorem Tax

Definition of "Ad valorem tax"

Written by

Melissa Thompson

Keller Williams Realty Cityside

The term ad valorem comes from Latin, and its literal translation is “according to value”, which makes the ad valorem tax definition easy to understand. Defining ad valorem tax accounts tax levied in proportion to the value of the property being taxed either on the value when the purchase is made or on the assessed value of the property. Localities levy the most common tax on real property; however, it can also be levied on personal property, such as an automobile.

According to how an ad valorem tax is calculated in the US, we have two types: property taxes and sales taxes. The property tax is the one where real estate is taxed based on its value, while the sales tax applies to goods and services. The most common and well-known ad valorem tax is the property tax levied on real estate properties. This real estate ad valorem tax is sanctioned by local jurisdictions like counties or school districts.

What is the Ad Valorem Tax?

Going from the Latin term translation, ad valorem taxes are calculated according to the asset’s value. The most common way to apply ad valorem taxes is through municipal property taxes. Real estate owners pay these taxes after periodical, usually annual, assessments that determine the property’s fair market value.

A way to better understand the difference between sales taxes and property taxes, which are both ad valorem taxes, would be to look at a newly purchased property. During the transaction, we encounter one ad valorem real estate tax in the form of a sales tax. That is the tax activated by the sale of an asset, which in this case is coincidentally a real estate property. The sales tax is paid only once during the purchase of the asset. The second tax we will encounter as property owners is also an ad valorem real estate tax, but this time in the form of a property tax. This is the tax that is paid annually by every real estate owner.

One thing to keep in mind is that property taxes can be applied to homes, land, land improvements, as well as boats and cars. In all these cases, the property tax is an ad valorem tax as the amount levied is set according to the assessed value of the property.

How to Calculate Ad Valorem Taxes?

The town’s municipality most often levies real estate ad valorem taxes. Other government entities that can levy these taxes are counties and school districts, but also special taxing districts. It’s essential to be aware that ad valorem taxes can be levied by not just one entity in some cases, and both the city and county can levy property taxes at the same time. This is because property taxes are the most significant source of revenue for municipal and state governments.

From the beginning of the year, tax assessments are calculated to determine ad valorem taxes for properties. They represent a percentage of the assessed value of the property, which varies by state, so be sure to check with your local government. These assessments are done annually to keep track of the way market value changes in an area. If an owner disagrees with the assessed value of their property, they can demand a reassessment on their own cost. If they can prove the original assessment was wrong or needs correcting, the property tax will be changed accordingly.