What Is an Ad Valorem Tax?
An ad valorem tax is a tax based on the assessed value of an item, such as real
estate or personal property. The most common ad valorem taxes are property
taxes levied on real estate. However, ad valorem taxes may also extend to a
number of tax applications, such as import duty taxes on goods from abroad.
KEY TAKEAWAYS
An ad valorem tax is a tax based on the assessed value of an item, such
as real estate or personal property.
The most common ad valorem taxes are property taxes levied on real
estate.
The Latin phrase ad valorem means "according to value." So all ad
valorem taxes are based on the assessed value of the item being taxed.
Property ad valorem taxes—i.e. property taxes—are usually levied by local
jurisdictions, such as counties or school districts.
Ad valorem taxes are generally levied on both real property (land, buildings
and other structures) and major personal property, such as a car or boat.
How Ad Valorem Tax Works
The Latin phrase ad valorem means "according to value."1 All ad valorem taxes
are levied based on the determined value of the item being taxed. In the most
common application of ad valorem taxes, which are municipal property taxes, the
real estate of property owners is periodically assessed by a public
tax assessor to determine its current value. The assessed value of the property is
used to compute a tax annually levied on the property owner by a municipality or
other government entity.
Ad valorem taxes, which are based on ownership of a real asset, can be looked
at in contrast to transactional taxes, such as sales taxes. While ad valorem taxes
are determined and levied annually, transactional taxes are only levied at the
time of a transaction.