What is Ad Valorem Tax?

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When it comes to real estate ownership, taxes are an unavoidable aspect that investors consider for profitability. This includes estimating purchase price and projecting earnings. One significant tax property owners deal with is the ad valorem tax or property tax. Let’s explore ad valorem tax and its evaluation process, vital for assessing property value as investments.

Key points:

  • Ad valorem tax is based on the appraised value of real property and differs from sales or income tax.
  • Local authorities typically impose ad valorem or property taxes annually, paid through an escrow account.

So, what is ad valorem tax? The term ‘ad valorem’ means ‘according to value’ in Latin. Unlike excise or transactional taxes, ad valorem tax is proportionate to the assessed value of the property. It is commonly used for real property like land or buildings.

The assessment of ad valorem tax is based on the property’s value. A public tax assessor estimates the fair market value, reflecting the estimated sales price. This assessed value is used to calculate property taxes, with the tax rate being a fixed proportion. The tax is levied annually.

While ad valorem taxes are typically imposed by local jurisdictions, they can also come from county governments, school districts, and other specific-purpose districts. Depending on the property’s location, investors may face multiple ad valorem taxes from various entities. Ad valorem taxes serve as a crucial income source for local and state governments.

Five types of real estate fall under ad valorem tax: residential, commercial, industrial, land, and special use properties. The tax percentage for ad valorem property tax is determined by the type of real property being assessed.

Understanding ad valorem tax: A practical guide

Before investing in property, it’s beneficial to have a clear idea of ad valorem tax. Don’t worry, it’s not as complex as it may seem. Here’s a simple formula to get started: Ad valorem tax = Assessed value x Tax rate. The assessed value is usually determined by a tax assessor, but you can estimate it using the listing price. The tax rate is based on the property’s location and can be obtained from your local tax commissioner’s office.

Let’s consider an example. Imagine you’re looking to invest in a single-family home in Tampa, Florida, listed at $499,000. The property is in Hillsborough County, which has a county tax rate of 1.09% based on the property’s value. So, the estimated annual county ad valorem or property taxes for this home would be $5,433.10, approximately $453.26 per month.

Keep in mind that this is a conservative estimate, as properties in Tampa are also subject to school levies, city levies, and four special district levies. City taxes are calculated using millage rates, where one mill is equal to 1/1000 of a dollar. Tampa’s millage rate is 19.71, resulting in approximately $19.71 for every $1,000 of the property’s taxable value. This adds up to an estimated annual property tax of $9,835.29 or approximately $819 per month.

Florida offers a homestead exemption for primary residences, which lowers the assessed value and reduces property taxes. However, since our example property is an investment, you would be subject to the higher tax rate.

This example serves two purposes: it demonstrates how to calculate potential tax obligations and highlights the importance of understanding local tax districts and exemptions. You can obtain all the necessary information from local tax authorities.

Ad valorem or property taxes fund public services such as schools, law enforcement, fire protection, libraries, infrastructure, road maintenance, parks, and community projects.

Typically, ad valorem tax is included in monthly mortgage payments. Mortgage services often collect tax payments in installments, deposit them into an escrow account, and pay them annually on your behalf. However, if permitted by your mortgage lender, you may choose to pay your taxes directly to the local tax collector’s office annually or semi-annually.

Final thoughts

Property taxes are inevitable when owning real estate. When considering property investment, use this knowledge to your advantage. It can help you determine housing affordability and monthly mortgage payments, crucial for setting a competitive rent price to ensure profitability.

Why deal with the complexities of ad valorem taxes when investing in real estate? 

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