Ad Valorem Tax
A tax based on the assessed value of property, from the Latin meaning 'according to value.' Property taxes are the most common form of ad valorem taxation, calculated as a percentage of the property's appraised value.
Understanding Ad Valorem Tax
Ad valorem taxes are calculated by multiplying the property's assessed value by the applicable tax rate. The tax rate is typically expressed in dollars per $100 of value or as a millage rate (dollars per $1,000). Multiple taxing jurisdictions—county, city, school district, special districts—may each levy their own ad valorem taxes.
The assessed value may differ from market value. Many jurisdictions assess property at a percentage of market value, and exemptions may reduce the taxable amount further. Understanding how assessments work in a particular jurisdiction helps investors estimate carrying costs and identify potential assessment appeals.
Ad valorem taxes create the liens that drive tax sale investing. When owners fail to pay these taxes, the taxing authority's lien takes priority over most other claims (though federal tax liens and some municipal liens may have equal or superior priority). This priority position makes tax lien investing relatively secure.
The annual nature of ad valorem taxes means delinquencies compound over time. A property might have multiple years of unpaid taxes, and each year's taxes accrues its own penalties and interest.
Real-World Example
A property is assessed at $200,000. The combined tax rate from all jurisdictions is $2.50 per $100 of value. Annual property taxes are $5,000 ($200,000 ÷ 100 × $2.50). If unpaid for 3 years with 12% annual penalties, the total owed grows to approximately $18,500.
Texas-Specific Information
Texas has no state property tax—all property taxes are local. Texas properties are assessed at 100% of market value by county appraisal districts. The average effective property tax rate in Texas is among the highest in the nation at approximately 1.8%, though rates vary significantly by location. Texas allows property owners to protest their assessed values annually.
Related Terms
Assessed Value
The value assigned to a property by tax authorities for purposes of calculating property taxes. Assessed value may differ from market value based on assessment ratios, exemptions, and caps on value increases.
Tax Rate
The percentage or dollar amount per unit of value used to calculate property taxes. The tax rate multiplied by the assessed value equals the annual property tax bill. Rates are set by local taxing jurisdictions.
Homestead Exemption
A property tax reduction for owner-occupied primary residences. The exemption reduces the taxable value of the home, lowering the annual property tax bill for qualifying homeowners.
Tax Lien Certificate
A certificate issued by a government authority representing unpaid property taxes. The certificate holder earns interest on the delinquent taxes and may eventually foreclose on the property if taxes remain unpaid.
Track Deals Involving Ad Valorem Tax
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