Ad Valorem Tax – Definition

An ad valorem tax (Latin for “according to value”) is a tax whose amount is based on the value of a transaction or of property. It is typically imposed at the time of a transaction, as in the case of a sales tax or value-added tax (VAT). An ad valorem tax may also be imposed annually, as in the case of a real or personal property tax, or in connection with another significant event (e.g. inheritance tax, expatriation tax, or tariff). In some countries a stamp duty is imposed as an ad valorem tax.

A property tax, millage tax is an ad valorem tax that an owner of real estate or other property pays on the value of the property being taxed. There are three species or types of property: Land, Improvements to Land (immovable man made things), and Personal (movable man made things). Real estate, real property or realty are all terms for the combination of land and improvements. The taxing authority requires and/or performs an appraisal of the monetary value of the property, and tax is assessed in proportion to that value. Forms of property tax used vary between countries and jurisdictions.

Ad valorem” is used most frequently to refer to the value placed on property by the county tax assessors. An assessment is made against this value by applying an assessment rate (e.g. 100%, 60%, 40%, etc.). The net assessment is determined after subtracting any exemptions to which the property owner is entitled (e.g. homestead exemptions), and a tax or millage rate is applied to this net assessment to determine the ad valorem tax due from the property owner.

The two main basis for determining the ad valorem value are fair market value and current use value. The fair market value is based on the typical selling price for property on which the buyer and seller can agree, with the assumption that the property is being used or will be used at its highest and best use after the sale. The current use value is the typical selling price for property with an assumption that it will continue after the sale to be used in its current use rather than being converted to its highest and best use. State legislatures have created many variations to these two main valuation approaches.

In some states, a central appraisal authority establishes values on all properties and distributes these to the local county or jurisdiction taxing authority, which then sets a tax rate and imposes the local ad valorem tax. In other states, a central appraisal authority values certain properties that are difficult to value at the local level (e.g. railroads, electric companies and other utility companies) and sends these values to the local county or jurisdiction taxing authority, while the local tax assessors determine the value on all other property in the county or jurisdiction.

Ad valorem” tax, most frequently referred to as property tax, relates to the tax that results when the net assessed value of a property is multiplied times the millage rate applicable to that property. This millage rate is usually expressed as a multiple of 1/1000 of a dollar. Thus the fractional amount of 0.001 will be expressed as 1 mill when expressed as an ad valorem tax millage rate.

The tax determined from multiplying the ad valorem assessment times the ad valorem tax rate is typically collected by the tax collector or tax commissioner.

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