Ad Valorem

Ad valorem is a Latin phrase meaning "according to value" and is the basis for how property taxes are calculated in the United States. An ad valorem tax is levied as a percentage of the assessed value of a property, as determined by the local tax assessor's office. This is the most common method of property taxation and is the foundation that creates the tax lien investing market.

The ad valorem tax rate, often expressed in "mills" (one mill equals one-tenth of one cent, or $1 per $1,000 of assessed value), varies by jurisdiction and is set by local governing bodies such as county commissions, school boards, and municipal governments. A property's total ad valorem tax is the sum of all applicable millage rates multiplied by the property's assessed value.

When property owners fail to pay their ad valorem taxes, the resulting delinquency creates tax liens that may be sold to investors. Understanding how ad valorem taxes are calculated helps investors evaluate potential investments. Properties with higher assessed values will have larger tax obligations, and therefore larger potential liens — but they also tend to be more likely to be redeemed by owners with more equity at stake.

Ad valorem taxes fund essential public services including schools, fire departments, road maintenance, and local government operations. This public purpose is why tax liens are given such high priority in the lien hierarchy and why governments have strong incentives to ensure these taxes are eventually collected — either from the property owner or through the sale of tax lien certificates and tax deeds.