What is an Ad Valorem tax?
An ad valorem tax is a tax based on the assessed value of an item, such as real estate or personal property. The most common ad valorem taxes are property taxes levied on real estate. However, ad valorem taxes can also extend to a number of tax applications, such as taxes on import duties on goods from abroad.
Ad Valorem tax
Breakdown of the Ad Valorem tax
The Latin phrase ad valorem means “by value”. All ad valorem taxes are levied on the basis of the determined value of the taxed item. In the most common application of ad valorem taxes, which are municipal property taxes, the property of landowners is periodically assessed by a tax expert to determine their current value. The assessed value of the property is used to calculate a tax levied annually on the owner by a municipality or other government entity.
Ad valorem taxes, which are based on ownership of a real asset, can be examined in contrast to transactional taxes, such as sales taxes. While ad valorem taxes are determined and collected each year, transaction taxes are collected only at the time of a transaction.
How Ad Valorem taxes are collected
Ad valorem property taxes are generally collected by a municipality but may also be collected by other local government entities, such as counties, school districts or special tax districts, also known as special purpose districts. Landowners may be subject to ad valorem taxes levied by more than one entity; for example, a municipality and a county.
Ad valorem property taxes are generally an important, if not the primary, source of revenue for state and municipal governments, and ad valorem municipal property taxes are commonly referred to simply as “property taxes”.
Determine tax values
Tax assessments for the purpose of determining ad valorem taxes are generally calculated on January 1 of each year. Ad valorem taxes represent a percentage of the assessed property value, which is generally the fair market value of the property. Fair market value is the estimated selling price of the property, assuming a transaction between a willing buyer and seller who both have reasonable knowledge of all the relevant facts about the property, and in a situation where neither party has the obligation to conclude the transaction. . Fair market value can be more simply understood as a reasonable price.
Goods subject to ad valorem taxes
Ad valorem taxes are generally levied on real estate and personal property. Real estate includes land, buildings and other structures, as well as any improvements to the property. An example of improvement is a garage added to a single family home or a road built on land. Ad valorem taxes on personal property are most often collected only on major personal assets, such as a car or boat. Personal accessory goods, such as household appliances or clothing, are generally not subject to personal property taxes.