Investopedia defines ad valorem tax as:
A tax based on the assessed value of an item, such as real estate or personal property.
ad valorem is a latin phrase meaning "according to value". Real estate and personal property are taxed on their assessed value. Hence, property tax is an ad valorem tax.
The county assessor is responsible for determining the value of every property in the county. Once all properties in the county are valued and the appeals-hearings process is complete, the county adopts a tax rate. Then:
ad-valorem property tax = property's assessed value * tax rate
Say, a property was assessed at $100,000. And the tax rate was set at 1%. Then the tax is:
$100,000 * (1/100) = $1,000
When an assessor values a property, several factors can help you lower your property's assessed value. Some common exemptions are:
Exemptions lower a property's assessed value, which consequently lower the property tax.
Property tax protest is the right of a property owner to protest their property's assessed value (Ad valorem value). Once an assessor assesses a property's value, every property owner is provided a Notice of Assessed Value. Upon receipt of such a notice, the property owner has the right to appeal their assessment value with either the county's Assessor ("Informal Protest") and/or the appeals board ("Formal protest").
Ad valorem tax encompasses any tax that is levied based on the value of the good or service. Property tax is one of those. Other examples include sales tax, import duties, value added tax, goods and services tax etc.
Most counties let property owners take up appeals directly with the assessor (Informal appeal) or file their appeal before a panel (Formal appeal). Such a panel is called by various names e.g, Assessment Appeals Board in California or Appraisal Review Board in Texas. Watch this short video for tips to succeed with your appeal.
As a real property owner, you must know that the amount of tax you pay is a proportion of the property's assessed value. For tax purposes, a local government carries out periodical property valuations to determine the assessed value of property. These assessments are typically calculated as of January 1 each year. The exact steps to assessing a property vary by jurisdiction.
In Texas, all properties are assessed as on January 1st of each year. Assessment notices are mailed by March 31st. Homeowners have until May 15th or 45 days from the date of receipt of the notice, to file a protest. Protests first go through an informal hearing with the assessor. If an agreement is reached, then a new assessed value is set on the property. If not, the protest then goes to ARB. Appeal hearings are generally resolved by the end of August. Thereafter, budgets are adopted and tax rates set. Tax bills are then mailed to homeowners.
In California, Prop 13 limits property tax to 1% of its assessed value. Also, the assessed value of a property cannot increase more than 2% per year, regardless of the fair market value. A property's assessed value gets reset to the market value only when there is a sale.
In sum, by understanding ad valorem tax, you can avoid paying more than necessary when you file your property tax.
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