Updated: Jan 29, 2022
We often see this word “ad valorem”. Many people don’t know what this word means, especially people from China like me. Ad valorem is a Latin phrase which means “according to value”. This word is often a part of terms relating to taxation, such as ad valorem tax, ad valorem assessment, and non-ad valorem assessment. Here I will give a brief explanation of these terms.
An ad valorem tax is a tax based on the value of an item, such as real property or personal property. The most common ad valorem taxes are property taxes levied on real estate. Generally, ad valorem taxes are levied by a local government entity, such as cities, counties, or school districts. Every year the local public property appraiser assesses the value of all real property in the county. The city or county then establishes its millage rate, which is the tax rate that will be applied against the assessed value to determine the amount of tax the property owner must pay.
The ad valorem tax of the real estate property is typically calculated based upon the status and value of the property as of January 1 each year. It represents the property’s fair market value on that date, which is the estimated sale price of the property. It assumes a transaction between a willing buyer and a willing seller who both have reasonable knowledge regarding the facts about the property and where neither party is compelled to complete the transaction by outside factors.
Ad valorem taxes can be levied on both real property and personal property. Real property includes land, buildings and other structures and any permanent improvements to the property. Personal property ad valorem taxes are levied on major personal property holdings, such as a car, motor vehicle, or boat. It also called movable property or chattels. For example, every time we renew our car registration, we are charged a fee. In some states this fee includes an ad valorem tax on the value of the car. Other states have separate ad valorem taxes on personal property. Certain categories of personal property, such as household appliances and clothing, are not usually subject to personal property taxes. Business equipment, furniture and inventory are often subject to personal property taxes.
An ad valorem tax also refers to the tax levied on a transaction or other significant event such as inheritance tax, expatriation tax or tariff. It is imposed at the time of the transaction, it also called a transfer tax, sales tax or value-added tax. It also refers to the tax calculated assessed on the sales price in connection with a real estate transaction. Ad valorem taxes are a major source of revenue for State and municipal governments, especially in States that don’t have a personal income tax. Virtually all State and local sales taxes in the United States are ad valorem taxes.
Ad valorem assessment refers an evaluation of the value of an asset or item. It occurs when an asset’s value must be determined for the purpose of taxation. Property tax assessments are based on comparable sale prices and the level of tax set by the local or State government. These assessments are often done by an assessor, who evaluates the physical improvements on the property, its overall condition, size, etc. and compares the property to the sales price of other comparable properties in the same area.
A real estate tax includes ad valorem taxes and non-ad valorem assessments. A non-ad valorem assessment is a special assessment or service charge which is not based on the value of the property. There are three major types of the non-ad valorem assessments: Community Development Districts, Special Taxing Districts and PACE Districts.
A Community Development District is a local, special-purpose government alternative to a municipality for managing or financing infrastructure to promote the development of a community. They use tax-free bonds to lower the initial development costs for these communities. Developers and the local government form a Community Development District (a CDD) to issue these bonds to pay for the cost of initial infrastructure, such as storm sewers, roads, water supply, utilities, swimming pools, clubhouses, parks, etc. Generally, County Commissioners approve these bonds, and the property owners pay for them over a period of 10 to 30 years. The developer is obligated to disclose the existence and projected assessments of the CDD to the initial buyers. These CDD assessments are included in your annual real estate tax bills. When you purchase a property, you may consult with your real estate agent or research pending CDD assessments on the property tax website.
A Special Taxing District, also known as an Assessment District, is a designated area where property owners have agreed to allow a county or municipality to provide public improvements and special services that are paid for through a non-ad valorem assessment. The services provided within the district are beyond those traditionally provided by county or municipal government and include services, such as street lighting, security service, multipurpose maintenance, and capital improvements. Special Taxing Districts are billed to property owners as non-ad valorem assessments. These non-ad valorem assessments may appear on the property owners Notices of Proposed Property Taxes. Sellers are required to disclose this Special Taxing District tax and to record the buyers’ written acknowledgement in the public records.
A Property Assessed Clean Energy (PACE) District assessment is imposed when the local government allows property owners to obtain financing for qualifying improvements, such as a low-cost, long term financing option for a variety of energy efficiency, renewable energy, water conservation, storm protection and seismic improvements to your property. PACE financing can be used for improvements on commercial, residential, nonprofit, light industrial and agricultural properties. Some of the most commonly financed improvements are qualified solar systems, Energy-efficient heating and cooling systems, hurricane impact windows and doors, roofing, insulation and ducts, pool pumps, water heaters, drought tolerant landscaping and water saving plumbing repairs.
A PACE District may appear on the TRIM Notice, which is the notice of projected assessment and taxes for a property that is sent out each year, or on the property tax bill in the form of a non-ad valorem assessment. In most case, when you sell the property, the new owner will be responsible for the remaining PACE District payments. Sometimes, mortgage lenders require the seller to pay off the full amount of the PACE District loan prior to the sale or refinance of the property. The seller is obligated to disclose the PACE District loan to the buyer. You also can find if there are any non-ad valorem assessments against a property by checking on the Property Appraiser’s website under the TRIM (Truth in Millage) Notice.
Taxation is an extremely complicated topic. Here I have given a simple explanation to help you understand the meaning and uses of ad valorem and non-ad valorem assessments. You always need to consult with your tax expert to give you advice on these matters.