Ad Valorem Tax

What Is an Ad Valorem Tax?

Ad Valorem Tax is a type of tax that is based on the value of an asset. The most common variant of such taxes are property taxes levied on real estate, but Ad Valorem Tax may also apply to other areas, such as duty taxes on goods imported from abroad.

How Ad Valorem Tax Works?

Ad valorem taxes generally are applied to property but can also apply to cash and business inventories. Ad valorem is Latin for “according to value.” This means that the tax is levied either as a percentage of the value of the good or property taxed or according to a predetermined fixed amount per unit of the goods or based on just value.

Ad valorem taxes are a type of property tax that is charged as a percentage of a property’s assessed value. Commonly referred to simply as “property tax,” these taxes may be collected by a school district, county government, or city government.

Ad valorem tax is in contrast to transactional taxes, like sales tax. While ad valorem taxes are typically annual, transactional taxes are only charged at the point of sale or when services are performed.

How Ad Valorem Taxes Are Levied?

Ad valorem taxes are dictated by a government’s taxing authority. For example, ad valorem taxes are typically charged by local municipalities but may be charged by other local areas with tax powers, such as counties or school districts.

Ad valorem property taxes are typically the most significant funding source for most state and local governments, particularly at the municipal level.

Property taxes are not only a source of funding for schools, health care, transportation, and day-to-day operations within local governments – they’re also an important tool for encouraging homeownership within a community. With that in mind, it’s no surprise that states and municipalities are always looking for ways to increase revenue generation from land uses such as commercial and multifamily residential property.

Property taxes are imposed on the property owner per year based on assessed value. When added to a home’s annual property tax bill, it can vary greatly depending on where the property is located, its age, and other factors.

Determining Tax Values

When setting ad valorem tax values, assessments are usually calculated as of January 1 each year. Ad valorem taxes are assessed as a percentage of the assessed property value, commonly the property’s fair market value.

Fair market value is the estimated amount of money that a property would likely sell for on the open market, assuming all information about the property was shared with potential buyers.

The idea behind fair market value is that the buyer and seller have both considered what the price should be, and they’ve come to a reasonable conclusion. Fair market value is what a willing buyer would pay for a property and what a willing seller would accept for it, assuming both have adequate knowledge of the property and neither party has any special considerations.

Property Subject to Ad Valorem Taxes

Both real property and personal property are subject to ad valorem taxes. Land, buildings, and structures are the main parts of real property. Examples of structures include single-family homes, condominiums, and multifamily residential buildings.

Improvements are things added to the property. Personal property ad valorem taxes are paid on personal property that is deemed to have value. This is usually vehicles and other large assets but not domestic appliances or clothing.

Examples of Ad Valorem Taxes

  1. Land Value Tax (LVT) is a tax on land value irrespective of any buildings or improvements on the land. LVT is an important and growing political issue in many countries.
  2. Sales tax is usually included in the price, as it’s a consumption tax. A sale tax could be added to the price, which means it would be tax-exclusive.
  3. A VAT (or GST) is a tax levied on exchanges. It’s different from a sales tax because a sales tax is levied on exchanges’ total value. A VAT is levied on the added value that results from each exchange.