Next video:
Loading the player...

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.

Related Articles
  1. Taxes

    Taxes: Who Pays And How Much?

    When it comes to taxes, the debate is endless on who pays what, especially in Congress. With no new initiatives in sight, let's take a look at who is paying now.
  2. 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.
  3. Taxes

    Your Property Tax Assessment: What Does It Mean?

    Understanding your property taxes can protect you from financial shocks.
  4. Taxes

    4 Little-Known Ways to Reduce Your Property Taxes

    Here are little-known ways you can reduce your property tax liability.
  5. Financial Advisor

    6 Hidden Government Revenue Streams

    You may be well aware of the tax dollars the government withholds from your paycheck, but this isn't the only way your income is being tapped.
  6. 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.
  7. Taxes

    How to Reduce Your High Property Taxes

    Think your property taxes are too high? Here's some advice on how to get your home reassessed, using New Jersey property taxes as an example.
  8. Investing

    What You Should Know About Real Estate Valuation

    Anyone involved in a real transaction can benefit from gaining a basic understanding of the different methods of real estate valuation.
  9. Taxes

    5 State Tax Issues For When You Leave the Military

    When you're budgeting for post-military life, certain state tax issues need to be considered.
  10. Taxes

    How To Prevent A Tax Hit When Selling A Rental Property

    Rental property ownership has its benefits but when selling you can face a big tax hit. Thankfully there are ways to reduce your capital gains exposure.
Hot Definitions
  1. Covariance

    A measure of the degree to which returns on two risky assets move in tandem. A positive covariance means that asset returns ...
  2. Liquid Asset

    An asset that can be converted into cash quickly and with minimal impact to the price received. Liquid assets are generally ...
  3. Nostro Account

    A bank account held in a foreign country by a domestic bank, denominated in the currency of that country. Nostro accounts ...
  4. Retirement Planning

    Retirement planning is the process of determining retirement income goals and the actions and decisions necessary to achieve ...
  5. Drawdown

    The peak-to-trough decline during a specific record period of an investment, fund or commodity. A drawdown is usually quoted ...
  6. Inverse Transaction

    A transaction that can cancel out a forward contract that has the same value date.
Trading Center