What is an 'Ad Valorem Tax'

An ad valorem tax is 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 may extend to a number of tax applications, such as import duty taxes on goods from abroad. Ad valorem property taxes are typically a major, if not the major, revenue source for both state and municipal governments, and municipal property ad valorem taxes are commonly referred to as simply "property taxes."

The Latin phrase, ad valorem, means "according to value." In short, all ad valorem taxes are levied based on the determined value of the item being taxed. In the most common application of ad valorem taxes, municipal property 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 used to compute a tax annually levied on the property owner by a municipality or other government entity.

Ad valorem taxes, which are based on ownership of a real asset, can be looked at in contrast to transactional taxes, such as sales taxes. While ad valorem taxes are determined and levied annually, transactional taxes are only levied at the time of a transaction.

Property ad valorem taxes are usually levied by a municipality but may also be levied by other local government entities such as counties, school districts or special taxing districts, also known as special purpose districts. Property owners may be subject to ad valorem taxes levied by more than one entity, for example, both a municipality and a county.

Determining Tax Values

Tax assessments for the purpose of determining ad valorem taxes are typically calculated as of Jan. 1 each year. Ad valorem taxes represent a percentage of the assessed property value, which is commonly the property's fair market value. Fair market value is the estimated sales price of the property, assuming a transaction between a willing buyer and a willing seller who both have reasonable knowledge of all pertinent facts about the property, and in a situation where 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 and other structures, and any improvements to the property. An example of an improvement is a garage added to a single family home or a road built on land. Personal property ad valorem taxes are most commonly levied only on major personal property holdings, such as a car or boat. Incidental personal property, such as household appliances or clothing, is not usually subject to personal property taxes.

BREAKING DOWN 'Ad Valorem Tax'

RELATED TERMS
  1. Property Tax

    A tax assessed on real estate by the local government. The tax ...
  2. Special Tax Bond

    A type of bond that is repaid by revenues derived from taxation ...
  3. Mill Rate

    The amount of tax payable per dollar of the assessed value of ...
  4. Assessed Value

    Assessed value is the dollar value assigned to a property for ...
  5. Wealth Tax

    It is a tax based on the market value of assets that are owned. ...
  6. Hidden Taxes

    Taxes that are indirectly assessed upon consumer goods without ...
Related Articles
  1. Taxes

    What is an Ad Valorem Tax?

    An ad valorem tax is a levy placed on real or personal property based on the assessed value of that property.
  2. Taxes

    This Is How Property Taxes Are Calculated

    Understanding how property taxes work will ensure that you won't be overcharged.
  3. Investing

    Your Property Tax Assessment: What Does It Mean?

    The amount of a property tax bill is based on the property’s value, the exemptions it qualifies for, its use and the local property tax rate.
  4. Taxes

    The 7 Best States For Property Taxes, and Why

    Understand why some states have high property taxes while others have low property taxes. Learn about the states with the lowest property taxes.
  5. Investing

    How Property Taxes Are Calculated

    Property taxes are calculated through use of the mill levy and the assessed property values.
  6. Taxes

    Understanding Excise Taxes

    An excise tax is an indirect levy charged for the sale or use of a particular item.
  7. Taxes

    Your Property Tax Assessment: What Does It Mean?

    Understanding your property taxes can protect you from financial shocks.
  8. Investing

    Your Property Tax Assessment: What Does It Mean?

    Property taxes are a primary source of revenue for governments, and they’re a big expense for homeowners. They can vary widely depending on where you live.
  9. Taxes

    Sell Your Rental Property For a Profit

    Being a landlord can be taxing, especially when you want to sell. Find out how to reduce your burden.
  10. Taxes

    Getting U.S. Tax Deductions On Foreign Real Estate

    If your home or second home is not in the United States, you can still get U.S. tax deductions. How many and what kind depends on whether you also rent it.
RELATED FAQS
  1. How are real estate taxes calculated?

    Find out how real estate taxes are calculated; failure to pay these taxes that can be a substantial annual expense can lead ... Read Answer >>
Hot Definitions
  1. Pro Forma

    A Latin term meaning "for the sake of form". In the investing world, it describes a method of calculating financial results ...
  2. Trumpcare

    The American Health Care Act, also known as Trumpcare and Ryancare, is the Republican proposal to replace Obamacare.
  3. Free Carrier - FCA

    A trade term requiring the seller to deliver goods to a named airport, terminal, or other place where the carrier operates. ...
  4. Portable Alpha

    A strategy in which portfolio managers separate alpha from beta by investing in securities that differ from the market index ...
  5. Run Rate

    1. How the financial performance of a company would look if you were to extrapolate current results out over a certain period ...
  6. Hard Fork

    A hard fork (or sometimes hardfork) is a radical change to the protocol that makes previously invalid blocks/transactions ...
Trading Center