What Is Ad Valorem Tax?
Ad Valorem tax is a Latin phrase that means "according to value." Most ad valorem taxes in Alabama are taxes on real estate or tangible personal property. Ad valorem taxes are sometimes also referred to as property taxes, which is not entirely accurate because some Southern states categorize certain types of personal property taxes differently than ad valorem taxes.
Common examples of ad valorem tax are residential property taxes, commercial property taxes, machinery and equipment taxes, rental property taxes, and certain motor vehicle taxes.
This type of tax is often calculated with reference to a percentage of the property’s value, and that percentage is a judgment call made by the taxing authority. For example, the State of Alabama and Montgomery County have a combined property tax millage rate of about 1.35%, which means that if your taxable property value is $100,000 the ad valorem taxes will be roughly $1,350. However, the City of Montgomery tax rate is slightly less than 1% of the value of taxable properties .
Compounding the problem is that different Alabama counties have different policies and rates. For example, Montgomery County levies a 4% sales tax while its neighbor Elmore County levies only 2%. This means that for people who live in the Montgomery County line but buy products in Elmore County will pay 8% sales tax (the Elmore County tax of 2% plus the Alabama state sales tax of 4%) instead of the 9% that their neighbors will pay.
However, the ad valorem tax exemption for real estate construction permits is worth noting. A motor vehicle tax exemption is limited to purchases in the month of April, but real estate is exempted from payday loans during the entire construction period, which can sometimes be years.
The exact tax rate varies from county to county because each county has the right to impose differing tax rates for numerous purposes. For instance, some counties require voters to vote on whether to fund improvements to schools or parks. On the other hand, in some states, counties have no such power, and the ad valorem tax rate is standardized statewide.
Calculating Alabama Ad Valorem Tax
Ad Valorem Tax is easily calculated in Alabama. While some states may have different rules or nuances, the formula for calculating Ad Valorem Tax in Alabama is straightforward. The formula is (Millage Rate) x (Assessed Value of Real Property) / 1000 = Taxes Owed.
Let’s look at how this works.
Tax Assessor Slater presents the following example.
You have a property whose taxable value is $200,000 and the total millage rate for that property is 60 mills (60/1000). Multiply the assessed value ($200,000) by the mills (60) and divide by 1000. That means that the property taxes you owe on that property are $12,000. ($200,000 x .060) = $12,000.
It all comes down to the millage rates that your property is subject to.
Every property in Alabama is subject to ad valorem taxes for education, county services, state services, city services, and school district services, if applicable. In some areas of the state, fees are also charged for solid waste and fire districts. Each of Alabama’s 67 counties sets the millage rate for its property.
The millage rates in Alabama run between 1 and 35 mills for city, county, and other municipal services. Municipalities and local government bodies may not charge more than 35 mills in city taxes. All towns and cities with populations over 100,000 charge more than 26 mills in city tax rates, and most charge more than 28. In larger cities such as Birmingham and Huntsville, the millage rates are 30 mills.
Considering that the average rate for real property is 30 mills and that personal property is taxed at 100%, the average total real property taxes are about 30%. Personal property taxes run between 1 and 59 mills, with an average of 35 mills. Some places have no taxes on personal property at all.
Revenue from ad valorem taxes provides funding for schools and governments across the state. Generally, the county sets the tax rates, though the state has the right to override them as necessary. What taxes are paid on property varies depending on its valuation and other local factors.
Who Is Subject to Ad Valorem Taxes in Alabama?
Subject to some exceptions, every person or entity who owns taxable property on October 1st of each year is responsible for paying that property’s ad valorem taxes. The owner is usually the person or entity to whom the property is titled. However, an owner’s credit rating may be affected if it fails to pay the ad valorem tax, since the taxes attach to the property on October 1st and are payable on October 1st of the following year. So, for example, John Doe will owe ad valorem taxes for his property taxes on October 1st, 2019, because he owned the real property on October 1st, 2018. If the property taxes have not been paid, the unpaid balance, including any interest or penalties, will attach to that property for as long as John Doe is the owner of record.
Personal property tax follows the owner of the property. Therefore, if John Doe owns unsecured personal property on October 1st, he is liable for that property’s ad valorem taxes. Unsecured personal property is defined as "all tangible personal property not taxed in the state as ad valorem property at a fixed rate." The personal property of a corporation subject to the Alabama Business Privilege Tax (ABPT) is unsecured personal property. Business personal property of all other persons and entities is generally taxed as unsecured property.
If two or more persons jointly own property, they are jointly responsible for paying tax on that property. It is common for spouses to jointly own property and even though both persons are, legally, responsible for paying the ad valorem tax, the tax bill will be issued in the name of one person. Alternatively, a husband may own property in his name and his wife may own property in her name. In this case, the property tax bill for each item of property will be issued in the name of the owner of record. Although they are not required to issue notices to one another, it is a good practice for spouses to communicate with each other and agree who will pay the tax due on such jointly-owned property.
Exceptions to the person or entity responsible for paying ad valorem taxes on personal property are made for properties held in certain business entities, such as qualified retirement plans. If property is owned by an "association" in trust, the "association" will be responsible for paying the personal property taxes on that property. If property is owned by a Revocable Trust, the trustee should ensure that the tax is paid, if the property is not otherwise exempt.
It is not uncommon for a property deed to need to be reformed or corrected to incorporate this result, for example, if investment property is held by John Smith and Mary Jones, they may wish to reformat the deed to show an undivided interest of 50% so that they are each responsible for their share of the tax.
A 20 year recapture of delinquent taxes will be attached to the new owner of the property, if the new owner does not make the previous owner pay the delinquent tax prior to purchase. This can be avoided by confirming with the tax collector that all taxes are paid prior to acquiring the property.
Alabama Ad Valorem Tax Exemptions and Reductions
In Alabama, there are several exemptions and reductions to ad valorem taxes. These exemptions can vary depending on the type of property, the income level of the owner, and certain other factors. For example, homestead exemption is available for all owner-occupied residences in Alabama. The exemption applies to the first $4,500 of the assessed value of the property for state purposes and the full amount of assessed value for local purposes. There are also additional exemption programs for senior citizens, the blind, totally and permanently disabled persons, and veterans.
One major exemption is the Homestead Exemption for persons over 65 years of age or permanently and totally disabled persons. To qualify for this exemption, the property owner must be a resident of Alabama and at least 65 years old or permanently and totally disabled according to the standards established by the Alabama Department of Veterans Affairs or Social Security Administration. The exemption applies to the first $4,500 of the assessed value for state ad valorem tax purposes and must be claimed by filing a homestead exemption application with the local Board of Equalization prior to December 31 of the year prior to the year for which you wish to have it effective.
A Homestead Exemption is available for owner-occupied residential property that is the principal place of residence of persons who are legally blind under the age of 65 or who are permanently and totally disabled. A person applying for the exemption must be a resident of Alabama and be legally blind in at least one eye, according to the standards provided by the Rules and Regulations of the Alabama Blind Services. The exemption applies to the first $4,500 of the assessed value for state ad valorem tax purposes and must be claimed by filing a homestead exemption application with the local Board of Equalization prior to December 31 of the year prior to the year for which you wish to have it effective.
There is also a Homestead Exemption for owner-occupied property that is the principal place of residence of any persons who are totally and permanently disabled from any occupancy which restricts mobility and is not expected to be recoverable. A totally and permanently disabled person means a person who is unable to walk without the use of mechanical assistance or a wheelchair, is hearing impaired, is missing an arm or leg or is blind. To apply for this exemption, the disability must be certified by a physician licensed to practice medicine or surgery in Alabama or by the United State Veterans Affairs Department or Social Security Administration. The exemption applies to the first $4,500 of the assessed value for state ad valorem tax purposes and must be claimed by filing a homestead exemption application with the local Board of Equalization prior to December 31 of the year prior to the year for which you wish to have it effective.
In addition to these exemptions, Alabama also offers a Tax Abatement Incentive Program. This rules and regulations establishing eligibility and application process as well as the types of property that are eligible for the program must be set out in the local governing authority resolution. Generally, the local governing authority in Alabama has the power to exempt certain non-educational ad valorem taxes on capital improvements on an industrial and business activity as well as on institutional and research activities.
Deadlines and Penalties for Ad Valorem Tax in Alabama
In Alabama, ad valorem tax deadlines are determined by the state or local taxing authority after communicating with the Department of Revenue. As a general rule, Alabama real property taxes become due on October 1 of each year and are delinquent on January 1 of the following year. Property taxes become a lien against the property on January 1, and the tax collector begins taking legal action to collect late taxes in February of the year after they are due.
The usual penalty for paying ad valorem taxes late is a 1½% per month interest charge, with no more than 20% charged after the due date. This can potentially run to 40% for a very small parcel of land.
For personal property, the general rule is that the tax payer must submit a return to the local Board of Review listing all personal property subject to ad valorem tax. Depending on the county or city , that return must usually be submitted to the Board of Equalization by October 1 of each year. Firms that develop software packages to track personal property owned often battle between wait-and-see return timing, and early returns for full calendar year, or fiscal year companies.
If a return is not timely submitted, the local tax assessor will appraise the property and send a notice of appraisal to the tax payer. In most jurisdictions this process occurs in June of the year after the property is due. If the property is not listed on the tax rolls by October 1, a mandatory 15% penalty is charged for delinquency. As to real estate, the tax payer is still entitled to a hearing within two years from the date the property was assessed. Time limits for personal property assessment are not as clear, but are commonly 60 days.
It is possible to get an extension of time to file an ad valorem tax return. An extension of time is also possible when a taxpayer who does file a return receives a notification of appraisal from the local Board of Review.
Appealing Ad Valorem Tax Assessment in Alabama
Prior to May 1 each year, the Alabama Department of Revenue ("ADOR") will publish and distribute through the Alabama Tax Tribunal appraisal lists and tax rates of personal property for each County of the State of Alabama for the following year. This article will not examine tax rates nor personal property. Rather, this article will examine the procedures in appealing ad valorem tax assessments.
After ADOR publishes the appraisal lists and rates, the local Tax Assessor for each County will perform equalization of the lists and determine fair market value of the property within the County. On or before October 1 of each year, the local Tax Assessor will mail to each taxpayer a notice of assessment "setting forth the valuation . . . and no tax rate shall be assessed at a value that does not appear on the notice of assessment."
Upon receipt of the assessment notice, the taxpayer must within 30 days pursue an informal review with the Tax Assessor relating to the value assessed, and shall email the informal review statement to [email protected]. The simple email provides a sufficient challenge to the Tax Assessor. In the event the Tax Assessor declines to change the value, the taxpayer may appeal the Tax Assessor’s decision to the Alabama Property Tax Appeals Commission within 30 days after receiving written notification of the Tax Assessor’s decision. The taxpayer must pursue the appeal to both the Commission and the local Revenue Commissioner. The Commission has the exclusive jurisdiction to hear appeals from affirmances by county revenue commissioners.
The Effects of Ad Valorem Taxes in Alabama
The impact of ad valorem taxes on Alabama residents and businesses goes beyond the simple act of paying taxes on properties and vehicles. In the context of economic impacts, the taxes generated for cities and counties can play a significant role in community budgets and will, in turn, impact the quality of services delivered to residents. Understanding these taxes can help residents make informed decisions when it comes to approving new taxes or negotiating budgets with local officials and legislators.
Furthermore, ad valorem taxes impact the financial health of Alabama as a whole. Large industrial or corporate clients will rely on the cost of ownership, including taxes, when deciding whether to invest in a new location or existing site. Alabama has a relatively competitive property tax environment for industrial development when considering cap rates, millage rates, and other factors, particularly when compared to a number of states that have franchise taxes or business license taxes. Strong property tax revenues have also allowed municipalities to build infrastructure without having to specifically earmark funding in advance of specific projects or defaults to financing. This reduces the state’s administrative burden of managing funds or establishing separate funds for specific projects, or administering complex refund schemes.
In addition to taxes paid on property values, owners or lessors also must pay taxes on the value of personal property. This valuation process has significant impact on the real estate market for state entities involved in buying, selling, leasing, or developing property. For example, a property owner or buyer will need to accurately report improvements to the property so that the tax representation will properly include new values when determining the cost of ownership. This also impacts the value of the property for resale purposes, since purchasers often use taxes paid as an indicator of value. Even making changes to the types of property held by a lessor may require an updated appraisal increase the proper valuation of real property at the time of purchase.
Modern ad valorem assessment systems can provide substantial information regarding market activity, which is important for both local and state agencies. Without accurate and timely assessments based on market data, developers risk overpaying for property with high lease rates that owners were unable to manage appropriately . In turn, these high operating costs are handed down to employees and residents and passed on to the rest of the community as employers reduce number of employees or increase lease rates to accommodate the additional costs.
The use of technology to streamline assessment processes can save time, reduce errors, and increase the quality of analysis. State agencies or other taxing jurisdictions can utilize programs to value large groups of similar properties quickly and efficiently. In addition, modern communication technologies can reduce the burden on property owners to respond to taxpayer organization requests. However, there is always significant concern in the community that technology increases the opportunity to make errors. Despite training and implementation of best practices, taxation advocacy groups have complained about value disparities among neighboring communities or counties. This is particularly recognized in the industrial communities because valuation standards tend to vary from state-to-state. To some extent, however, this can be explained by the disparate needs of the different communities.
Accurate valuation is the essential basis for tax assessment because all other components of the assessment process require accurate property values. Often determination of a business’s property value becomes a costly assessment dispute, where the burden falls on the taxpayer to prove the valuation utilized by the local tax assessor is accurate. For taxpayers in Alabama this may simply be a necessary expense of doing business that should be recognized when providing general advice, but to the average taxpayer the cost of commercial property valuations may be difficult to swallow.
While Alabama for many years had a highly segmented assessment and valuation process, the increased use of technology and a focus by the state on requiring additional state level oversight of assessment and valuation – including inspection – will give citizens and owners confidence that there is a valid process for accurate reporting. Changes to the valuation process do not guarantee a reduction of value, and in fact, can lead to increased values, but for the average taxpayer who may not be a corporate entity experienced in property valuation, the result is almost certainly an increased burden to demonstrate the local assessment is inaccurate.