Ad Valorem

What Does Ad Valorem Mean?

An ad valorem tax is a tax imposed on the assessed value of an item. The term, fittingly, comes from the Latin phrase meaning “according to value.” Ad valorem taxes are typically applied to real estate and personal property, including duties on goods imported from abroad.

Municipalities commonly refer to ad valorem taxes as property taxes, which often serve as a significant source of revenue and operational funding for state and local governments.

Insuranceopedia Explains Ad Valorem

Under an ad valorem scheme, the taxed amount is based on the value of the transaction or property being taxed. For goods, the tax is typically imposed at the time of the transaction, as seen with sales taxes and value-added taxes.

In contrast, ad valorem taxes on real estate and personal property are assessed and levied annually. Property taxes are usually imposed by local government entities, such as counties, school districts, and special purpose districts. Property owners may be taxed by multiple entities. Because ad valorem property taxes scale with a home’s assessed value, more expensive homes tend to carry higher annual tax bills, and average homeowners insurance premiums also vary widely by ZIP code for related reasons tied to property value and local risk. Many homeowners use the arrival of their annual tax bill as a reminder to revisit their coverage and compare the best homeowners insurance companies before renewing.