What Is an Ad Valorem Tax?
An ad valorem tax is calculated based on the value of an item of property such as real estate or personal property. The Latin phrase ad valorem means "according to value." Ad valorem taxes are based on the assessed value of the item being taxed.
The most common ad valorem taxes are property taxes levied on real estate but they're also assessed as a component of car registration. They may extend to tax applications such as import duty taxes on goods from abroad.
Key Takeaways
- 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.
- Property ad valorem taxes or property taxes are usually levied by local jurisdictions such as counties or school districts.
- States may levy ad valorem taxes in the form of car registrations.
- Ad valorem taxes are generally levied on both real property and major personal property such as a car or boat.
Investopedia / Ryan Oakley
How an Ad Valorem Tax Works
The Latin phrase ad valorem means "according to value." Ad valorem taxes are levied based on the determined value of the item being taxed.
Municipal property taxes are the most common application of ad valorem taxes. The real estate of property owners is periodically assessed by a public tax assessor to determine its current value. The assessed value of the property is then used to compute a tax annually levied on the property owner by a municipality or other government entity.
Ad valorem taxes are not transactional taxes such as sales taxes. They're determined and levied annually. Transactional taxes are levied only at the time of purchase.
How Ad Valorem Taxes Are Levied
Property ad valorem taxes are usually levied by municipalities but they may also be levied by other local government entities such as counties, school districts, or special taxing districts that are also known as special purpose districts. Property owners can be subject to ad valorem taxes levied by more than one entity such as by both a municipality and a county.
Ad valorem property taxes are typically a major if not the primary revenue source for both state and municipal governments. Municipal property ad valorem taxes are commonly referred to as simply "property taxes."
Determining Tax Values
Tax assessments to determine ad valorem taxes are typically calculated as of Jan. 1 of each year. Ad valorem taxes represent a percentage of the assessed property value that's commonly the property's fair market value.
Fair market value is the estimated sales price of the property assuming the transaction is made between a willing buyer and a willing seller who both have reasonable knowledge of all pertinent facts about the property. Neither party has a compulsion to complete the transaction. Fair market value can be more simply understood as just a reasonable price.
Property Subject to Ad Valorem Taxes
Ad valorem taxes are generally levied on both real property and personal property. Real property includes land, buildings, other structures, and any improvements made to the property.
A garage added to a single-family home or a road built on a parcel of land would be examples of improvements. Personal property ad valorem taxes are most commonly levied on only major personal property holdings such as a car or boat. Incidental personal property such as household appliances or clothing isn't usually subject to personal property taxes.
What Are Ad Valorem Taxes Used For?
Ad valorem taxes are levied for different purposes. The money raised from property taxes is generally used to fund local government projects such as schools and parks.
What Is an Ad Valorem Tax for Car Registration?
Some states assess ad valorem taxes as a component or condition of motor vehicle registration fees. A vehicle can't be registered without payment of the tax. An owner is typically entitled to a pro-rata reimbursement of any ad valorem taxes they've paid if the vehicle is stolen, totaled, or removed from the state.
How Are Ad Valorem Taxes Assessed?
Property taxes are the most common ad valorem tax. They're assessed based on the value of your property. Specific tax rates are then applied accordingly. Property taxes in the U.S. are commonly assessed based on a county tax rate. The value of the property must typically be certified such as by a state department of assessments and taxation.
The Bottom Line
Ad valorem taxes can come in various forms but they're all based on the concept that you pay a certain amount of tax based on an assessed value and a tax rate. You'll most likely face ad valorem taxes as property tax if you own a home or as car registration fees.
