Ad Valorem Property Taxes
Ad valorem property taxes are annual taxes assessed on real estate that is a percentage of the property's assessed value. Local governments and tax districts use the revenue to pay for local services. Although states have the right to assess taxes on property, the assessment of property taxes is usually delegated to the local municipalities. Although there is no federal ad valorem tax, the federal government can and does impose taxes on income and capital gains generated by property. Additionally, the federal government can also attach tax liens to property for the nonpayment of federal taxes.
Local governments, cities and counties, establish tax districts to collect taxes for specific services. Tax districts do not usually coincide with municipal boundaries. Tax districts provide funding for:
- schools and colleges
- public libraries
- fire departments
- retirement funds for the district
- health services
- nursing homes
- roads and bridges
- water management
Additionally, a temporary special tax district may be established for a specific purpose, limited in time, until the funded operation is finished.
Property owned by governments and by nonprofit organizations is exempt from real estate taxes. Exemptions or reductions may also be granted to specific groups of people, such as senior citizens, disabled individuals, and surviving spouses. Certain businesses or industries may also receive a reduction or exemption to promote the growth of the business within the municipality.
Most states also have a homestead exemption, where a portion of the assessed value for a primary residence may be exempt from property taxes. Additionally, the homestead exemption can also protect some value from creditors, and usually a minimum value can be protected under bankruptcy. To receive the homestead exemption, the states may require a minimum of time residing on the property, and in some cases, the property must be owned by the head of the family, although some states allow single people to claim the homestead exemption. In some states, the homestead exemption is granted automatically; in others, the property owner must file for the homestead exemption every year.
Property taxes are generally based on assessed property value, or a percentage thereof, which is determined by state law. The assessment of the property values is done by the county or township tax assessor or appraiser. Some properties are partially or wholly exempt from ad valorem taxes, such as government property. Land and improvements may be assessed separately.
Because real estate property taxes are the major funding for local governments, the tax rate is generally determined by funding requirements for the specific tax district or municipality. Therefore, the tax rate may change annually to finance the changing budgets of these local governments and tax districts. Local tax rates are usually measured as mils per $1,000 dollars of assessed value, where 1 mil = 1/1000, so a tax rate of 1 mil would equal $1 of tax liability for every $1,000 dollars of assessed value. So a rate of 1 mil would generate $100 of tax revenue per $100,000 of assessed value within the local tax jurisdiction.
States generally set the maximum for the absolute millage rate or for any annual increases in property taxes. Therefore, the tax districts must restrict their budget so that it can be funded within the statutory limits.
The ad valorem tax rate is calculated by the funding required by the tax districts or municipality divided by the tax base, which is the assessed value of all the taxable properties within the district or municipality. The local tax rate is generally measured in mils, which is a number divided by 1000. So 125 mils would equal 0.125 = 1.25%. The tax rate is then applied to each taxable property, multiplied by its assessed value or percentage to yield the tax liability.
Tax Rate = Tax Requirements/Tax Base
So if the tax base for a district is $30 million, and budget requirements equal $1 million, then the tax rate would equal $1 million/$30 million = .03, or 30 mils.
Example: Calculating Ad Valorem Property Taxes on a Home with a Homestead Exemption
- Assessed value: $100,000
- Homestead Exemption: $40,000
- Taxable Base = Assessed Value – Homestead Exemption = $100,000 – $40,000 = $60,000
- Local Tax Millage Rate: 25 mils
- Local Tax = Taxable Base × Local Tax Millage Rate = $60,000 × 0.025 = $1500
If the assessed value is unusually high or low in a particular area, then the tax authorities may use equalization factors to equalize the tax rate for similar properties in different districts or counties. Tax districts may issue bills at different times of the year, possibly because they have a fiscal year instead of a calendar year. Generally, the county will collect consolidated bills from each of the tax districts within the county.
There may also be special assessments, such as for sidewalks, sewers, and water service, which are assessed pro rata on the properties that benefit from the special assessment. When the projects are finished, then the special assessment is discontinued. If the assessment is created by the tax district, then an involuntary tax lien is attached to each property liable for the assessment. If the property owners petition the government for improvements, then a voluntary tax lien is assessed on the properties receiving the benefit of the assessment. Property owners can pay the assessment in a lump sum or over a period of years.
Property owners may appeal the assessed value, but not the tax rate. There is a statutory time limit after receiving notice of the assessed value in which to appeal. Generally, the appeal would have to be based on real estate appraisal techniques, such as comparable sales, to dispute the assessed value.