# Understanding Ad Valorem Tax: Definition, Calculation, and Application

## What Is an Ad Valorem Tax?

An ad valorem tax is calculated based on the value of an item of property such as real estate or personal property. The Latin phrase _ad valorem_ means "according to value." Ad valorem taxes are based on the assessed value of the item being taxed.

The most common ad valorem taxes are [property taxes](https://www.investopedia.com/terms/p/propertytax.asp) levied on real estate but they're also assessed as a component of car registration. They may extend to tax applications such as import duty taxes on goods from abroad.

### Key Takeaways

*   Ad valorem taxes are assessed based on the fair market value of property, meaning they reflect what the property would likely sell for in a regular market transaction between knowledgeable buyers and sellers.  
    
*   These taxes, commonly seen as property taxes, are crucial revenue sources for local and state governments, funding essential public services like schools and parks.  
    
*   Real property, including land and buildings, and significant personal property, such as cars or boats, are typically subject to ad valorem taxes, while smaller personal items are usually exempt.  
    
*   The annual determination of ad valorem taxes involves property assessments by local tax authorities, which affect rates and subsequent tax obligations for property owners.  
    
*   Distinct from transactional taxes like sales tax, ad valorem taxes recur annually and are not dependent on a sale or purchase happening in the tax year.

![Ad Valorem Tax](https://www.investopedia.com/thmb/NLBsAGsSmmGTf2vuXushVn_yVXk=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/advaloremtax.asp-final-029f64b4f4d648a0b20fee668599b47a.png)

*— Investopedia / Ryan Oakley*

## Understanding Ad Valorem Taxation Mechanics

The Latin phrase _ad valorem_ means "according to value." Ad valorem taxes are levied based on the determined value of the item being taxed.

Municipal property taxes are the most common application of ad valorem taxes. The real estate of property owners is periodically assessed by a public tax assessor to determine its current value. The [assessed value](https://www.investopedia.com/terms/a/assessedvalue.asp) of the property is then used to compute a tax annually levied on the property owner by a municipality or other government entity.

> **Important**
>
> Ad valorem taxes are not transactional taxes such as sales taxes. They're determined and levied annually. Transactional taxes are levied only at the time of purchase.

## Implementing Ad Valorem Taxes Across Jurisdictions

Property ad valorem taxes are typically charged by cities but can also be imposed by counties, school districts, or special purpose districts. Property owners might pay ad valorem taxes to both a city and a county.

Ad valorem property taxes are typically a major if not the primary revenue source for both state and municipal governments. City property ad valorem taxes are often just called "property taxes."

## Assessing Values for Ad Valorem Taxation

Ad valorem tax assessments are usually calculated on January 1 each year. Ad valorem taxes are a percentage of the property's assessed value, often its [fair market value](https://www.investopedia.com/terms/f/fairmarketvalue.asp).

Fair market value is the estimated sales price of the property assuming the transaction is made between a willing buyer and a willing seller who both have reasonable knowledge of all pertinent facts about the property. Neither party has a compulsion to complete the transaction. Fair market value can be more simply understood as just a reasonable price.

## Types of Property Under Ad Valorem Taxation

Ad valorem taxes are generally levied on both real property and personal property. Real property covers land, buildings, other structures, and improvements made to the property.

A garage added to a single-family home or a road built on a parcel of land would be examples of improvements. Personal property ad valorem taxes usually apply to major items like cars or boats.Items like household appliances or clothing typically aren't taxed as [personal property](https://www.investopedia.com/terms/p/personalproperty.asp).

## What Are Ad Valorem Taxes Used For?

Ad valorem taxes are levied for different purposes. The money raised from [property taxes](https://www.investopedia.com/terms/p/propertytax.asp) is generally used to fund local government projects such as schools and parks.

## What Is an Ad Valorem Tax for Car Registration?

Some states assess ad valorem taxes as a component or condition of motor vehicle registration fees. A vehicle can't be registered without payment of the tax. An owner is typically entitled to a pro-rata reimbursement of any ad valorem taxes they've paid if the vehicle is stolen, totaled, or removed from the state.

## How Are Ad Valorem Taxes Assessed?

Property taxes are the most common ad valorem tax. They're assessed based on the value of your property. Specific tax rates are then applied accordingly. Property taxes in the U.S. are commonly assessed based on a county tax rate. The value of the property must typically be certified such as by a state department of assessments and taxation.

## The Bottom Line

Ad valorem taxes can come in various forms but they're all based on the concept that you pay a certain amount of tax based on an assessed value and a tax rate. You'll most likely face ad valorem taxes as property tax if you own a home or as car registration fees.  

> **Article Sources**
>
> 1.  Cornell Law School Legal Information Institute. "[Ad Valorem Tax](https://www.law.cornell.edu/wex/ad_valorem_tax)."
>     
> 2.  Cornell Law School Legal Information Institute. "[26 CFR § 1.856-10 - Definition of Real Property](https://www.law.cornell.edu/cfr/text/26/1.856-10)."
>     
> 3.  Tax Foundation. "[States Should Continue to Reform Taxes on Tangible Personal Property](https://taxfoundation.org/tangible-personal-property-tax/)."
>     
> 4.  Alabama Department of Revenue. "[Vehicle Valuation](https://www.revenue.alabama.gov/property-tax/vehicle-valuation/)."
>     
> 5.  Maryland Department of Assessments and Taxation. "[A Homeowner's Guide to Property Taxes and Assessments](https://dat.maryland.gov/realproperty/Pages/HomeOwners-Guide.aspx)."