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An ad valorem tax is a levy placed on real or personal property based on the assessed value of that property.  In Latin, ad valorem means “according to value”. 

Property taxes are the most common type of ad valorem taxes. They are a major source of tax revenue for state and local governments, especially when those jurisdictions do not have an income tax.

Ad valorem taxes are based on a percentage of the assessed value of the property.  The tax is paid annually, and each year the taxing authority adjusts the property’s value based on current market conditions.  For instance, Juan purchased his home for $250,000.  Juan’s local taxing authority uses that price as the fair market value for the ad valorem tax assessment.  If the ad valorem property tax is 5%, then Juan will owe $12,500 in property taxes for the year. 

In subsequent years, the assessor in charge of property taxes in Juan’s state will send him a notice of their estimation of the current value of his home.  If the economy is growing, the assessed value of Juan’s home will increase, along with his tax bill.  This can become a burden to some homeowners.  Typically, property taxpayers can dispute the assessed value of their home by providing their own appraisal.  This will reduce their property taxes if they can prove the property’s fair market value is lower than the government’s assessed value.

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