What are Ad Valorem Taxes?
An ad valorem tax is a type of tax imposed on an item, the amount of which derives from the item’s value. The origin? Ad valorem is a Latin phrase meaning “according to value.” Usually specified as a fixed percentage, an ad valorem tax varies in amount depending on the value of the item the tax is applied to.
A good, and perhaps the best-known example, of an ad valorem tax is property tax. For property taxes, the amount taxed varies based on a property’s value.
Let’s say the property tax rate in a particular town is a fixed percentage of 0.87%. When that percentage is applied to different home values, it produces different tax amounts.
For instance, a home valued at $250,000 would be taxed $2,175, and one valued at $375,000 would be taxed $3,262.50. Ad valorem taxes increase as the item’s value increases.
An ad valorem tax contrasts with a ‘specific tax,’ which is always a fixed amount no matter the taxable item’s value.
What’s the Purpose of Ad Valorem Taxes?
Property tax—the most common ad valorem tax—represents a significant source of revenue for states and municipalities. Nationally, 75% of local tax dollars come from property taxes alone. Governing authorities use these funds to support a variety of public services, including:
- Fire departments
- Police departments
- Court systems
- Schools
- Hospitals
- Infrastructure (roads, bridges, and train stations)
- Parks and recreation
- Waste management programs
- Social services
- Community centers, and more
They’re also sometimes used to support new initiatives for the public good, such as:
- Building affordable housing
- Upgrading street lighting or emergency response equipment
- Implementing free public Wi-Fi to increase internet access
Note that ad valorem tax revenue doesn’t support all these items on its own. Municipal property taxes are just one of several funding sources governments draw on to finance community projects and services.
Still, governments rely heavily on ad valorem taxes to cover much of their spending.
Are There Different Types of Ad Valorem Tax? 3 Examples
While property tax is the most common form of ad valorem tax, sales tax and estate tax also involve value assessments in their calculations.
Property Tax
Real property—land and any structures permanently attached to it—is taxed annually.
Municipalities calculate ad valorem property taxes by applying the fixed tax rate to the property's value. The ad valorem tax rate may fluctuate from year to year, as might the value of a home.
For property and homeowners, this can make it hard to predict your property tax bill and how much you'll need to budget.
Some states generate additional funds by taxing real estate and property taxes levied on vehicles, boats, and other personal property.
Sales Tax
In most states—all but five (Alaska, Delaware, Montana, New Hampshire, and Oregon)—a sales tax is applied at the time of purchasing goods or services.
This sales tax applies mostly to retail sales, but some states have expanded their application to include certain services and other types of transactions. Again, sales tax rates vary by state, and additional local taxes may also apply. But the amount a buyer pays depends on the overall value of the purchase.
Sellers collect tax from purchasers and are responsible for passing on those funds to state or local tax authorities, usually on a monthly or quarterly basis.
Estate Tax
Some states charge an estate tax when property transfers from a deceased party to an heir. The federal government can also assess estate tax, but only toward estates worth more than $13.61 million. Since 2011, the filing threshold has increased each year.
Massachusetts, for example, charges an estate tax for estates valued at more than $2 million, and the tax rate increases according to the value of the estate, i.e., an ad valorem tax. The appropriate tax rate is then multiplied by the estate value to determine the total tax amount.
In What States Do Ad Valorem Taxes Apply?
Wherever you live in the U.S., you’ll have to pay the ad valorem real estate tax—there’s no escaping it! You can expect to pay more if you live in a state where the effective property tax rate is on the higher end, such as New Jersey, Texas, Illinois, New Hampshire, and Nebraska.
But the value of your house matters, too, which means your property tax bill could be relatively high even in states where the tax rate is lower. Hawaii, California, and New York have some of the highest home prices in the nation, a fact that certainly impacts property tax bills.
Some states offer ad valorem tax exemptions to both businesses and homeowners. If you qualify for an exemption, take advantage of it! Exemptions are an excellent opportunity to lower your property tax bill.
For example:
Some states, like Texas, Florida, and California, offer homestead exemptions that allow homeowners to exempt a portion of their home’s value from taxation—as long as your primary residence is there. In these states, exemption amounts range from $7,000 to as much as $100,000.
New York, Alabama, Iowa, and many other states have a variety of exemptions specific to veterans, senior citizens, and people with disabilities.
It’s important to note that exemptions for real estate taxes aren’t automatic—homeowners need to seek them out and apply for them. Visit our property tax exemption page to see if you qualify.
How Do Municipal Governments Determine Ad Valorem Taxes?
In real estate, the annual ad valorem tax is determined by two factors:
- The tax rate, and
- The assessed value of your home
Tax rates change, and there isn’t much you can do about it other than move. But the same isn’t necessarily true when it comes to your home’s taxable property value.
For purposes of property tax, house values are determined by local tax assessors. The mechanics of this process vary depending on where you live. For example, some towns assess properties every year, while others do it every other year or even once every few years.
The method of assessment varies, too. Some tax assessors visit each property individually to determine the value, but it's more often calculated using mass appraisal methods. Other factors also play into an assessor’s valuation, such as your home’s fair market value and the condition of the surrounding neighborhood.
As the property owner, you should receive notice if your home’s assessed value changes.
Examine this notice carefully.
If you don’t agree with the new valuation, you have the right to protest it. We recommend protesting as between 30%-60% of taxable property is overvalued.
Disputing Ad Valorem Taxes: Can You Save Money?
One unique aspect of ad valorem taxes is the interpretation of value involved. Not everyone will agree on the value of the item being taxed—in this case, property.
Most tax assessors do their best to be fair and accurate when assessing properties, but that doesn’t mean their assessments are always correct.
If you can gather evidence that your home value should be lower, you have a good chance of getting your assessment changed, which could reduce your property tax bill. This evidence might include:
Past year sales of comparable properties. A local realtor might be able to provide data, preferably covering the full tax-year time frame.
Information related to the condition of your home, including any recent damages. You’ll have a better case if the appraisal doesn’t account for a hidden defect like a cracked foundation, for example.
Information about upcoming repairs. If you’ve already gotten quotes for upcoming work or have a project scheduled, share the relevant paperwork.
Information about the local area that may be impacting property values. Take photographs of the neighborhood yourself to document its condition.
A third-party appraisal of your property. This will cost money but could serve as strong evidence in your favor.
Be aware that the window of time to launch a protest is often small, so you may need to act fast.
If you’d like to protest but aren’t sure where to start, reach out to us at Ownwell!
We’ll handle everything, from the initial filing and evidence-gathering to presenting your case to the local tax board.
We use local property tax consultants who know your housing market and have good relationships with local assessors. They’re also skilled in case-building and negotiation. Plus, they understand how to navigate the system smoothly. All you have to do is wait for the results!
Even better, you can log into your dashboard at any time and follow our progress if you like.
Our approach of combining advanced software with local expertise is the reason for our 86% success rate. On average, we’ve generated savings of more than $1,100 per customer. Plus, our services are risk-free: You pay nothing unless we win.
To get started, just answer a few quick questions.
Save Money on Your Property Taxes
Because your property taxes are based on a determinant value, the most important thing to remember about ad valorem property taxes is that you have some measure of control over them.
If your home’s assessed value is higher than it should be and you don’t take action, you could be losing hundreds or thousands of dollars every year.
If you’d like to protest but don’t feel confident you could build a successful case, Ownwell can help. Our service is hands-down the simplest, most effective way for homeowners to reduce their property tax bills.
In our customers’ words, it’s “extremely easy” and “totally worth it!” Start reducing the taxable value of your property by answering a few short questions here.
