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The Property (Ad Valorem) Tax

Ad valorem property taxes are levied on real or personal property by some states and many local governments, including counties, municipalities, school districts, and special taxing districts. Almost every homeowner is familiar with the tax because their annual property tax bill is usually one of their largest yearly expenses.

Ad valorem means a tax on goods or property expressed as a percentage of the sales price or assessed value. An ad valorem tax is like a sales tax in that it is usually calculated based on the property's purchase price. But the tax collector adjusts the amount annually to reflect any changes in value and bills the owner each year.

Below you'll find helpful information on how governments assess and collect property taxes.

What Property Is Taxed?

Real property taxes. Real property for property tax purposes generally refers to taxes on the value of items like land, buildings, structures, and all improvements or fixtures attached to them. In other words, it's a real estate tax. The definition of real property often excludes business personal property such as tools, implements, machinery, and equipment attached to or installed as real property for use in a business.

Personal property taxes. Taxing authorities may also tax tangible personal property. The taxable items vary by jurisdiction, but most do not impose property taxes on household goods, inventories, and intangible personal property such as patents and copyrights. Motor vehicles are often subject to personal property taxation.

Some types of property are exempt from taxes. These exempt properties generally include property owned by nonprofit entities, religious organizations, and governments. Also, some states and local governments will give exemptions for certain groups. For example, if a homestead exemption exists, a property owner will not pay taxes on their primary home.

Determining the Amount of Ad Valorem Taxes

Your ad valorem property tax bill is usually a percentage of the assessed value of the property being taxed on Jan. 1 of each year. The percentage is known as the millage rate, with a mill being equal to 1/1,000 of each dollar of valuation.

A property's assessed value is a tax assessor's annual determination of fair market value. A property appraiser working for the county tax authority usually makes this assessment. The appraiser is also responsible for maintaining the tax roll.

"Fair market value" is the price that a willing buyer would pay and a willing seller would accept for property, with neither party forced to buy or to sell.

Appraisers working for the taxing authority most often value the property. Most tax authorities require periodic property inspections as part of the valuation process and set appraisal criteria to find the fair market value. Such criteria include factors analyzing:

  • The cost and depreciation of the property
  • Comparable market data
  • The use of the property
  • Estimated annual net income the business property generates

Disputing Valuation

Upon notification of the assessment, a property owner may dispute the valuation. Taxpayers may request a hearing at the local level and, if necessary, appeal the valuation to a higher authority or court.

Levy of Tax and Classification

Once the assessor determines a taxable value for the tax year, they levy the tax and bill the property owner. Unlike the federal income tax, filing a tax return is unnecessary.

The tax rate may vary depending on how the property is classified. Property is often classified according to its use. Common classifications include commercial, industrial, multiple dwelling, residential homestead, agricultural, and business property.

Property Tax Issues? Get Help From a Tax Attorney

Property taxes come in different shapes and sizes, but they require someone to place a value on your property. If you disagree with the valuation and want to reduce your tax bill, a local tax attorney can help. A tax attorney will know the state laws the assessor must follow and can represent you in your challenge. A skilled attorney can also help if you have an unpaid property tax bill and must work out an arrangement to pay it.

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Next Steps

Contact a qualified tax attorney to help you navigate your federal and/or state tax issues.

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