Ad Valorem Tax

Reviewed by Annapoorna | Updated on Aug 27, 2020

Introduction

Ad Valorem tax is an important revenue source to the government. Owners of properties may be subject to such Ad Valorem tax which is levied by more than one authority. Property taxes is a famous example across the globe. Here, both the local municipality as well as the country may levy this tax.

Ad Valorem taxes refer to a percentage of the property's fair market value of the assessed property. Fair market value is the estimated selling price of the property, assuming a transaction is entered between an interested buyer and a willing seller. The tax authority may obtain all exclusive facts about the property and in a situation where neither of the party is compelled to complete the transaction. Fair market value can be more simply understood as just a reasonable price.

What is Ad Valorem Tax?

An Ad Valorem refers to tax based on the value assessed for an item. Examples include real estate or personal property. In addition to real estate, the ad valorem taxes may also apply in multiple taxability scenarios such as import duty taxes on goods from abroad.

The word ‘Ad Valorem’ is derived from the Latin phrase that means ""according to value"". These taxes are levied based on the value determined for the item being taxed. Most commonly, the ad valorem taxes concept is applied in case of municipal property taxes only. The property of the owner is periodically assessed by a public tax assessor to fix its current value. The property value assessed is used to compute a tax that is levied annually on the property owner by any taxable authority. Ad valorem taxes are levied based on the ownership of a real asset. In comparison to transactional taxes, such as sales taxes, they differ. The ad valorem taxes are determined and levied annually, whereas the transactional taxes are only levied at the time of a transaction.

Who is eligible to pay?

Ad Valorem taxes generally are levied on both real property and personal property. Real property includes buildings, land, and other such structures including improvements to the property. Example of an improvement of the property is a garage added to a single-family home or a road built on the land. Most commonly, personal property ad valorem taxes are levied only on major personal property holdings, such as a car or boat. Related personal property, such as household appliances or clothing, is not usually subject to personal property taxes.

A detailed breakdown of the procedure for filling the tax

The procedure to compute the ad valorem tax is fairly important. Payment of property tax is calculated during June of every year. The due dates also depend on state government or local authorities.