What Is Ad Valorem Tax, and How Do You Calculate It?

Posted by Colton Hoisager on Jun 21, 2022


An ad-valorem tax is a tax that is levied on the assessed value of real or personal property. The Latin term ad-valorem translates to English as “according to value.” These taxes can be annual taxes like property assessments or transactional taxes like sales taxes.

They are typically used to generate income for local government entities.

The most common examples are real property and significant personal property items. Let's look at a boat as an illustration. If a taxpayer buys a $100,000 boat, they will pay sales tax on the purchase, depending on the state in which they reside. The amount of the tax assessed is determined by the tax rate in that state plus any local assessment and by the vessel’s cost.

Transactional Assessments: Sales and Import Taxes

While sales taxes are typically set on a statewide basis, some states allow local enhancements. In some cases, these increases are earmarked for specific projects like transportation or housing. For example, California, a high-tax state across the board, has a statewide sales tax rate of 7.25 percent. However, local city and county additions increase that rate to as much as 10.75 percent in some areas. Similarly, while Illinois has a statewide sales tax rate of 6.25 percent, local governments can add to that. Chicago, for example, levies 10.25 percent on transactions within its jurisdiction. Even more striking, Arkansas has a state rate of 6.5 percent, but the small town of Gould has reached the highest rate in the U.S. at 11.5 percent by adding special assessments. 

This formula means that if you buy a $20,000 car in a locale with a five percent sales tax, the amount you pay is $1,000. However, if the local rate is ten percent, your tax is $2,000 instead.

Import taxes are far more complex and are often called tariffs or duties. These rates range from zero to 37 percent, although the average import tax is less than six percent. Some products are exempt from import tariffs, and some countries have special free trade agreements. As with a sales tax, the percentage determines the cost. For example, if you import a product and the rate for that product coming from that country is two percent, the import tax will be two percent of the price paid (in the case of a $20,000 item, that would be four hundred dollars). On the other end of the scale, if you import a product subject to a thirty percent import tax, that $20,000 item will carry a $6,000 tax fee.

Ad-Valorem Taxes Are Often Used for Real Estate

Ad valorem calculations are standard in determining the property tax for real estate. As with a sales tax, the locally determined tax rate is used along with the asset value to determine the charge. However, property taxes are typically assessed on an annual basis rather than at the time of sale. Also, like sales taxes, property taxes may be inflated by local additions to the base rate, such as school or police district levies (which may need to be approved by the residents).

This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions.Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.

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