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What are ad valorem taxes?

QUESTION:

I just moved here from Mainz, Germany and I am a little confused about American real estate taxes. Who decides what I should pay and where does the money go? Why are real estate taxes called ad valorem? I am about to purchase a house and would like to understand how this works.

ANSWER:

Real estate has been taxed throughout the world for most of human history. It is certainly handled differently in different countries.

Property taxes are usually the major source of income for city and county governments and pay for fire protection, street and road maintenance and other government expenses.

Local governments in the United States usually have a Tax Assessor’s Office whose job it is to set a value upon each parcel of taxable property in the jurisdiction. This is why property taxes are call ad valorem, based on the value. Sometimes establishing the value is done by appraising each property, but it is usually done by a simpler means including using the sale price of a recent change in ownership. Often all assessments will be adjusted by a specific formula to take inflation or other changes into account. If you think that the valuation is too high, it may be appealed.

Three elements are necessary to calculate property taxes: the tax rate, the appraised valuation of the property and the assessment ratio. The assessment ratio is applied to the appraised value to get the assessed value. The assessment ratio is sometimes fixed by law for the state. In Florida, the amount to be taxed is further reduced by the Homestead Exemption, for those who follow the procedures to claim their property as their principal residence.

After the assessed value has been determined and homestead exemption and/or other applicable exemptions have been subtracted, then the tax rate is applied to the assessed value to find the tax due. The tax rate is usually expressed as a mill, which is 1/10 of a cent. If the tax rate is 7.66 percent of the assessed valuation, or $76.60 per $1,000 of value, and the assessed value is $20,000, then the tax would be $1,532.

The property you purchase will probably be in more than one taxing jurisdiction. Many areas have a county tax, city tax, fire district, and school district. But all of these will be combined into one tax bill. Incidentally, government-owned land, churches, nonprofit private schools and other types of property that generally benefit the community may be exempt from property taxes.

Taxes are paid for the time that you actually own the property. If the seller has paid property taxes in advance, the amount prepaid will be credited to him at the closing. If the seller is past due in property taxes, the amount will be credited to you and will be your responsibility.

Past due property taxes automatically become a lien on the property affected. If the taxes remain unpaid, the property may be foreclosed upon and sold in order to pay the taxes. A tax lien takes priority over all other liens, including mortgages. Mortgage lenders sometimes include the collection and payment of property taxes as a requirement for the mortgage. Even if it is not a requirement, you may want to consider having the mortgage lender handle this process for you, especially if you are not a permanent resident of this country.

This information is not intended as specific legal advice to anyone and is based upon facts that change from time to time. Individuals should seek legal counsel before acting upon any matter involving the law.

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