Ad Valorem Taxation
Real Estate Property Taxes Explained for Exam Students
Property taxes are ad valorem taxes — based on value. The exam tests assessment ratios, mill rates, and exemptions. Here's the full framework with sample calculations.
What Is a Property Tax?
Property taxes (also called real estate taxes or ad valorem taxes) are levied by local governments on the assessed value of real property. 'Ad valorem' is Latin for 'according to value.'
The tax is calculated by applying the tax rate (mill rate) to the assessed value. Assessment ratios, exemptions, and appeal rights vary by jurisdiction.
Property Tax Calculation Practice
Question 1
A property has a market value of $400,000. The assessment ratio is 80%. The tax rate is 25 mills. What is the annual property tax?
Step 1 — Assessed value: $400,000 × 80% = $320,000. Step 2 — Convert mills: 25 mills = 0.025. Step 3 — Annual tax: $320,000 × 0.025 = $8,000.
Question 2
A property's assessed value is $250,000. The homestead exemption is $25,000. The tax rate is 20 mills. What is the annual tax after the exemption?
Taxable value: $250,000 − $25,000 = $225,000. Annual tax: $225,000 × 0.020 = $4,500.
Question 3
A local government needs to raise $5,000,000 in property tax revenue. Total assessed value of all property is $250,000,000. What is the required mill rate?
Mill rate = ($5,000,000 ÷ $250,000,000) × 1,000 = 20 mills.
Property Tax FAQ for the Exam
What is a mill?
One mill equals $1 of tax per $1,000 of assessed value (0.001 as a decimal). A 25-mill rate means $25 of tax per $1,000 of assessed value.
What is a homestead exemption?
A homestead exemption reduces the taxable assessed value of a primary residence. For example, a $25,000 exemption on a $200,000 assessed home means taxes are calculated on $175,000.
What is a special assessment?
A charge levied against properties that specifically benefit from a public improvement — such as a new sidewalk, sewer line, or street paving. Special assessments are a lien on the property.
How are property taxes prorated at closing?
Taxes are prorated between buyer and seller based on the number of days each owned the property during the tax year. Whether paid in arrears or advance affects which party owes which amount at closing.