October 17, 2021

Ad valorem property tax

What is ad valorem property tax?

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.

How is ad valorem property tax calculated?

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

What is ad valorem property tax exemption?

When an assessor values a property, several factors can help you lower your property's assessed value. Some common exemptions are:

  • Homestead exemption is available to owner occupied homes.
  • Senior citizen's exemption, for homeowners over 65 years of age.
  • Veteran's exemption - different property tax exemptions are available to veterans who have served in the U.S.Armed Forces, including veterans who have served in the U.S. Army, Navy, Air Force, Marines and Coast Guard.
  • Disabled veterans or first responders may also be eligible for an exemption.
  • In addition, several states have now begun to offer exemptions to homeowners who install solar power generating devices on their premises.
  • Religious places, places of worship and non-profits may also be eligible for exemptions.

A list of exemptions available to Texas homeowners is available here. California also has a similar list of exemptions. Other states offer identical exemptions.

Exemptions lower a property's assessed value, which consequently lower the property tax.

What is an ad valorem property tax protest?

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").

Is ad valorem tax the same as property tax?

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.

How to appeal ad valorem property tax?

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.

Ad valorem tax on real property

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.

Ad valorem property tax in Texas

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.

Ad valorem property tax in California

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.

Ad valorem property tax

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