Ad valorem tax

What is an ad valorem tax?

An ad valorem tax is a form of taxation based on the value of a transaction or a property, either real estate or personal property. It is generally calculated as a percentage of the value of the property, rather than on size, weight, or quantity. Ad valorem is Latin for “according to value.”

Deeper definition

An ad valorem tax is typically imposed when property is purchased in the form of value added tax or a sales tax. In some cases, it may be imposed later on a set basis, such as once per quarter or once per year. Ad valorem tax can also be imposed on estates and imports, and in other circumstances when property changes hands, such as inheritance.

Ad valorem taxes are calculated as a percentage of the assessed value of the property being taxed. The assessed value of the property typically means the annual determination of fair market value, or the price that a potential buyer would pay and a potential seller would accept for a property.

Property taxes on real estate and land value taxes are forms of ad valorem taxes. The proprietors of real estate or other properties pay this tax based on the value of their properties. With land value taxes, also called site valuation taxes or a site-value rating, only the land is taxed and any buildings or improvements on the land are not included in the calculation of the tax.

A sales tax is type of ad valorem tax on goods or services charged at the time of purchase. Sales tax can be added to the price of goods (tax-inclusive), or included at the point of sale (tax-exclusive). The economic burden of sales tax generally falls on the buyer, but in some cases may fall on the seller.

A value added tax (VAT) is imposed on business profits and labor. VAT is considered to be an indirect tax because the seller is responsible for paying the tax, though the buyer pays higher prices. VAT is different from sales tax in that VAT is levied only on the value added by the seller. The tax is imposed on the value added to the item at each stage of its production cycle and the price paid by the final consumer.

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Ad valorem tax example

If the market value of a 2,000-square foot home is $100,000, the ad valorem property tax is based solely on the home’s value, regardless of its relative physical size.

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