What Is Ad Valorem Tax in Real Estate?

An ad valorem tax is a tax based on the assessed value of a property. In real estate, this typically refers to property taxes imposed by local governments—cities, counties, and school districts. The term “ad valorem” comes from Latin and means “according to value.”

How Ad Valorem Taxes Work

Local governments determine the value of a property through an assessment. That assessed value is then multiplied by the local tax rate to calculate the amount owed.

  • Assessed value — determined by the local tax assessor.
  • Tax rate — often expressed as a millage rate.
  • Annual billing — ad valorem taxes are usually collected once or twice per year.

Because the tax is tied to property value, homeowners in rapidly appreciating markets may see their taxes increase over time.

Formula for Calculating Ad Valorem Tax

Ad Valorem Tax = Assessed Value × Tax Rate

Example:

  • Assessed Value: $400,000
  • Tax Rate: 1.25% (or 0.0125)

Tax Due = $400,000 × 0.0125 = $5,000 per year

Why Ad Valorem Taxes Matter in Real Estate

  • Buyer affordability — property taxes affect monthly payments and qualifying ratios.
  • Sellers — taxes impact prorations at closing and may influence buyer demand.
  • Investors — ad valorem taxes reduce net operating income and cash flow.
  • Local services — these taxes fund schools, fire departments, roads, and city services.

Ad Valorem Tax and FSBO Sellers

When selling a home, property taxes are usually prorated between buyer and seller based on the closing date. FSBO sellers should understand:

  • How much tax is owed at closing
  • How taxes appear on the Closing Disclosure
  • How assessments may affect buyer interest

Listing through Brokerless ensures your MLS listing includes accurate tax information to avoid delays.

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