Definition
An ad valorem tax is a tax whose amount is based on the value of a transaction or property. Derived from the Latin phrase “ad valorem,” which means “according to value,” this type of tax is commonly applied to real and personal property and is typically administered by local governments. The tax rate is generally expressed in mills, where one mill is worth one-thousandth of a currency unit.
Examples
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Real Estate Taxes: Cities, counties, and school districts often levy ad valorem taxes on the value of real estate within their jurisdictions. For example, if a property is assessed at $200,000 and the ad valorem tax rate is 20 mills, the property tax would be $4,000 annually.
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Vehicle Registration Taxes: Some local governments apply ad valorem taxes to the value of vehicles. For instance, if your car is valued at $25,000 and the tax rate is 10 mills, the annual ad valorem tax would be $250.
Frequently Asked Questions
Q: How is ad valorem tax calculated?
- A: The ad valorem tax is calculated by multiplying the assessed value of the property by the tax rate. For example, if a property is valued at $100,000 and the tax rate is 1%, the ad valorem tax would be $1,000.
Q: What are mills in the context of ad valorem tax?
- A: Mills are a unit of measure used in taxation, equivalent to one-thousandth of a currency unit. Therefore, an ad valorem tax rate expressed in mills is essentially the tax per thousand units of assessed value.
Q: Who assesses the value of property for ad valorem tax purposes?
- A: Local government assessors typically determine the assessed value of a property by evaluating various factors including land value, property improvements, and comparable sales data.
Q: Are there exemptions to ad valorem taxes?
- A: Yes, many jurisdictions offer exemptions for certain property types, such as primary residences, agricultural land, and properties owned by non-profits or veterans.
Q: How often are ad valorem taxes collected?
- A: Ad valorem taxes are usually collected annually, but some jurisdictions might have different arrangements such as semi-annual or quarterly payments.
Related Terms
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Assessed Value: The dollar value assigned to a property by a public tax assessor for the purposes of taxation.
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Mill Rate: A tax rate expressed in mills. One mill represents one-thousandth of a currency unit.
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Property Tax: A levy assessed by a local government on the value of a property.
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Market Value: The estimated amount that a property would sell for in a prevailing market.
Online Resources
- Investopedia - Property Tax
- IRS - Property Assessment and Property Tax
- National Association of Realtors
References
- “Property Taxes: A Guidance Manual for Local Governments,” National League of Cities, 2020.
- “Real Estate Investment, Income Tax Return Preparation, and Federal Taxation,” by Howard A. Norman and Jeanne C. Reilly, 2017.
Suggested Books for Further Reading
- “Real Estate Taxation: A Practitioner’s Guide,” by Charles A. Jenks
- “The Law of Property Taxation,” by Richard Somerville
- “Property Tax Made Simple,” by John R. McGill
Ad Valorem Tax Fundamentals Quiz
