What Is an Ad Valorem Tax?

Key Takeaways

Ad valorem, which means "according to value" in Latin, refers to the fact that a tax is levied as a percentage of a property's value.
Ad valorem taxes can be assessed once when an item is first purchased or brought across country lines. They also can be a periodic tax, as with real estate.
Ad valorem taxes in the U.S. are often levied at the state, county, city, or school district levels.
For real estate like homes and land, an official assessor will periodically reevaluate how much the property is worth for tax purposes, raising or lowering your tax bill as a result.

Definition and Examples of Ad Valorem Taxes

Ad valorem taxes are levied based on a percentage of an item's value. For example, a 6% sales tax added to the price of a new hairdryer would be an ad valorem tax.

Ad valorem is Latin for “according to value,” and this kind of tax is used quite often at the state and local level in the U.S. These taxes comprise a variety of taxes charged abroad, too.

When a country chooses a flat rate for an import tax or a value-added tax (VAT) that is issued when someone brings an item into or out of the country, that is often an ad valorem tax. The most common type of ad valorem tax in the U.S. is property tax—one of the main sources of revenue for local governments at the county or city level.

One of the complex elements of ad valorem taxes is that not everyone agrees on the assessed values assigned to their property. To decide your tax rate, an official assessor evaluates your property—similar to how an appraiser would evaluate it during a home sale process—and reaches an assessed value. If the property is believed to be worth more now than in the past, your tax bill will rise.

A community might charge a flat 1% property tax based on an assessed property value that is updated every few years, for instance. Many communities use these property taxes to pay for local government functions, as well as for public schools.

Note

While income taxes in the U.S. are progressive, meaning they levy higher percentages for higher income brackets, many ad valorem taxes are a set rate.

There are, however, ad valorem taxes that are only assessed at a certain value or higher. For instance, the U.S. federal estate tax is an ad valorem tax on the value of the estate but is levied progressively. This means higher tax percentages are owed depending on how much of the estate's value is above the exemption rate, which was $12.06 million for individuals in 2022 (rising to $12.92 million in 2023).1

An example of a tax that is not ad valorem would be a specific tax, such as 50 cents per gallon of gas. In this case, the assessed value of the gasoline wouldn't impact the total cost of the tax.

How Ad Valorem Tax Works

Some ad valorem taxes will be assessed at different, recurring frequencies. For instance, you are charged sales tax just once when you purchase a product. Property taxes, on the other hand, are often levied annually or even quarterly.

Examples of values that could be used to determine an ad valorem tax are the price of a product for a sales tax, or the assessed value of a home for a property tax.

Assessors do not always tax the market value of a property. For instance, West Virginia's State Tax Department states that the assessed value is actually 60% of what the fair market value would be.2

Note

To know what percentage of the fair market value your property tax is likely to be, you'll need to check with your state or local jurisdiction.

Consider an example. If you purchased a home and the current assessed value was $100,000, with a 1% property tax, you'd be paying $1,000 a year (100,000 x .01 = 1,000).

If your area went through an economic downturn right after the assessment, you would continue paying that $1,000 a year until the next assessment, even if your home was worth less if you attempted to sell it.

If you were in Ohio, for example, it takes six years before reassessment, which means you could be paying your $1,000 bill even if your property value plummeted.3 Other states have different requirements for how often a new assessment will occur.

That being said, your home also could increase in value. If this occurs and it is time for reassessment, some states and local jurisdictions send a notice to let you know that the assessment raised your home's value. If your assessed value rose to $120,000, for instance, you'd be given notice so that you could prepare for your property tax bill to be $1,200 that year (120,000 x .01 = 1,200).

Do I Need To Pay Ad Valorem Tax?

Some ad valorem taxes are assessed at the time of sale, such as sales tax. These taxes are part of your bill, making it easy to know they are due.

Note

Individuals who rent rather than become homeowners only pay indirectly when it comes to property tax. While landlords do have to charge rent that covers their expenses, you won't have to pay your own ad valorem property tax bill because that burden is on the landlord.

Beyond housing, other properties, including cars and boats, may also have some ad valorem taxes on them. However, as with other kinds of sales tax, they will be calculated and charged by the seller in many cases.

How Much Are Ad Valorem Taxes?

Ad valorem taxes can vary widely, from Tennessee's combined state and local sales tax of 9.55% to an average of less than 1% property tax in Hawaii. The ad valorem tax varies between counties, hence the average.45

In terms of dollars, however, a property owner in Hawaii might end up paying more in taxes than a property owner in another state with a higher rate because Hawaii's property values are often very high.

To calculate the impact of an ad valorem tax on your budget, you'll need both the effective rate of the tax and the value to which it will be applied, such as your average spending each month for a sales tax or your home's assessed value.

Frequently Asked Questions (FAQs)

How do you calculate ad valorem tax?

Find the ad valorem tax for your purchase or property by multiplying the value of the property or product by the tax rate. For example, to find the ad valorem property tax on a home, you would multiply the assessed value (say, $200,000) by the tax rate (such as 1.08%). The calculation would be 200,000 x .0108 = 2,160, so your ad valorem tax would be $2,160.

Where can I find the ad valorem tax for my car?

To find out how much tax you've paid on a purchase you already made, such as a car, look at the bill of sale. For periodic taxes, such as annual taxes, you may receive a bill in the mail. Your ad valorem tax may be called title ad valorem tax (TAVT), vehicle license tax (VLT), or something similar. To find out how much your tax will be before the tax is assessed, you'll need to find out the tax rate for your location. Some states even offer a tax rate calculator that can help you calculate the tax.