Ad Valorem Tax is an assessed tax on either real estate or personal such as boats or imported items. If you're a real estate owner, you will be fairly familiar with Ad Valorem Tax, but you probably know it by a more common name, property taxes.
The Latin term ad valorem means 'according to the value.' Ad Valorem Tax is applied to the assessed value of an asset. The amount due for property taxes varies by state and city, with the total percentage ranging between one and three percent. When paying property taxes, the entity issuing the tax is usually a local body such as a council or a school district. Property taxes can be levied by more than one entity. For example, taxes could be assessed by both a city and a county.
In most cases, the determined value is decided on by a periodic valuation by a public tax assessor or based on the recent purchase price of a property. This tax is determined and levied each year, as opposed to a sales tax which is only paid at the time of purchase. For example, if you purchase a property for $400,000 in a region where property taxes are 1.5%, your expected property taxes each year (until your next assessment) are $6,000 each year. Therefore, when purchasing a property, yearly property tax expenses must be considered as, for many, they are a hefty tax burden.
Because these taxes can be so costly, some cities offer a real estate tax abatement that either eliminates or significantly reduces the property taxes for specific properties. These programs exist to both help some buyers be able to afford a property and to attract buyers to less desirable areas. Depending on the area, tax abatements are available for properties with new construction, rehabilitation, or major improvements.
Tax abatements in cities, related to Ad Valorem Tax
In some cities, tax abatements are offered throughout the entire government area, while others offer them in specific areas, such as neighborhoods that need revitalization. Because tax abatements are usually limited to areas needing improvement, buyers should carefully consider if they are happy to live in that area. Think again if you think this could be an excellent way to save on taxes on an investment asset. Property tax abatements are only available while a property remains owner-occupied. It’s also important to note that some tax abatements programs are limited to low- or middle-income earners, so remember to check the fine print.
Properties can be purchased with an abatement already in place, or alternatively, you can buy a property and then establish an abatement. Typically, to qualify for a tax abatement, something needs to be done to a property to improve it and, therefore, the neighborhood. For example, to encourage new construction, the City of Cleveland is offering a 15 year, 100% tax abatement for new construction. Therefore, a new homeowner will only have to pay property taxes on the value of their land, but not any of the improvements for that period.
Cost of improvements to properties
While the cost of improvements to a property can appear significant at first, the potential tax savings can amount to tens or even hundreds of thousands of dollars over the years. If you're wondering if tax abatements are available in your area, the easiest way to find out is through a simple internet search. Alternatively, check with a local real estate agent who should be able to help guide you in the right direction and assist in finding an eligible property.
Get in touch today to find out how a property tax abatement could be your golden ticket to getting into this red-hot housing market.
