What Is an Ad Valorem Tax?
An ad valorem tax is a levy based on the assessed value of an item, such as real estate or personal property. The most ubiquitous ad valorem taxes are property taxes imposed on real estate. Nevertheless, ad valorem taxes extend to various tariff applications, such as import duty taxes on goods from abroad.
Key Takeaways
- An ad valorem tax is assessed based on the value of an item, whether real estate or personal property.
- Property taxes, which are ad valorem taxes, are commonly levied on real estate.
- The term ad valorem translates to “according to value”—all ad valorem taxes hinge on the assessed worth of the taxable item.
- Typically, local jurisdictions, such as counties or school districts, levy property ad valorem taxes.
- These taxes often apply to both real property (like land and buildings) and significant personal property (such as cars or boats).
How Ad Valorem Tax Works
Derived from the Latin phrase ad valorem, meaning “according to value,” these taxes are determined by the assessed value of the taxable item. In common practice, such as municipal property taxes, a public tax assessor periodically appraises the property to establish its current value. This assessed value then forms the basis for an annual tax imposed by municipalities or other government entities.
Ad valorem taxes, levied based on ownership of a real asset, contrast with transactional taxes like sales taxes, which are charged at the time of sale. Unlike sales taxes, which are event-based, ad valorem taxes are assessed regularly, often annually.
How Ad Valorem Taxes Are Levied
Property ad valorem taxes are primarily imposed by municipalities but may also be assessed by other local government bodies, such as counties, school districts, or special purpose districts. Property owners can be subject to these taxes from multiple entities; for instance, both a municipality and a county may levy taxes.
Municipal property ad valorem taxes, typically called “property taxes,” are a significant revenue source for state and local governments.
Determining Tax Values
Tax assessments for ad valorem taxes are generally conducted as of January 1 each year. Ad valorem taxes are a percentage of the assessed property value, often equivalent to the property’s fair market value.
Fair market value represents the likely sales price between a willing buyer and seller, with both parties reasonably informed about pertinent facts and neither under obligation to transact. Essentially, fair market value can be boiled down to a “reasonable price.”
Property Subject to Ad Valorem Taxes
Ad valorem taxes are commonly levied on real property and significant personal property. Real property includes land, buildings, and various physical improvements. An example of an improvement might be an addition like a garage to a home or building a road on land.
Personal property ad valorem taxes generally apply to substantial assets, such as cars or boats, but typically exclude incidental personal items like appliances or clothing.
What Are Ad Valorem Taxes Used For?
Proceeds from ad valorem taxes—especially property taxes—often fund local governmental initiatives, such as schools and public parks.
What Are Types of Ad Valorem Taxes?
Principal types of ad valorem taxes include property taxes and sales taxes. Such taxes are calculated based on an assessed value and applied tax rate and can also cover import duties.
How Are Ad Valorem Taxes Assessed?
Various ad valorem taxes exist, with property taxes being the most familiar. These taxes are assessed on the property’s value, with particular tax rates subsequently applied. In the U.S., these rates are often set by local jurisdictions like counties, following certification by agencies such as state departments of assessments and taxation.
The Bottom Line
Ad valorem taxes encompass different forms but uniformly follow the principle of taxation based on the item’s assessed value and applicable rate. You’re likely familiar with ad valorem taxes through transactions such as paying property tax on real estate or sales tax on purchases.
Related Terms: Property Tax, Sales Tax, Fair Market Value, Tax Assessor.
References
- Cornell Law School, Legal Information Institute. “Ad Valorem Tax”.
- Cornell Law School, Legal Information Institute. “26 CFR § 1.856-10 - Definition of Real Property”.
- Tax Foundation. “States Should Continue to Reform Taxes on Tangible Personal Property”.
- Maryland Department of Assessments and Taxation. “A Homeowner’s Guide to Property Taxes and Assessments”.
