Page 53 - Calculating Agriculture Cover 20191124 STUDENT - A

CH 4] Calculating Agriculture 4-15

PROPERTY TAXES

Ad Valorem Excise Taxes: Ad valorem is a Latin phrase that literally means
"according to value." This means the tax varies based on the value of the product or service
being taxed. For example, the IRS levies a 10 percent excise tax on indoor tanning services.
This means that if a tanning salon charges $100 for a tanning session, it must collect from
the customer to pay the IRS $10 in excise tax value. Similarly, if the company charges
$200 for tanning, it would collect from the customer an additional $20 excise tax and pay
this to the IRS.
Property are those things subject to ownership and include tangible or intangible (an
automobile or a copyright), immovable or movable (a warehouse or airplane). Ownership is
the right to possess and use a thing at the exclusion of others. Property may be classified in
terms of its nature, such as real or personal. Real property, which is real estate, also called
realty, includes land and anything permanently attached to the land, such as buildings,
trees, fences, sidewalks, and other improvements. All other property, which excludes realty,
is personal property. Personal property includes inventories, equipment (tractors, trucks &
automobiles), and intangibles, such as stocks, bonds, receivables, and bank deposits.
Cities and counties derive their operating funds from taxing property, real and personal.
Independent taxing districts such as public schools, parks, hospitals and utilities, derive
much of their revenue from property taxes levied against real property owners, and ad
valorem taxes levied on personal property. Businesses enterprises and individuals, without
exception, are subject to taxes on both real property and the personal property owned.
Property taxes are a significant expense for homeowners, year in and year out. Even
after the property mortgage is paid off the property taxes remain and periodically increase.
This why it's so important to understand the property tax bill. Knowing how a property tax
is calculated allows the property owner to plan and budget for what that bill could be each 4
year.
The assessed value of property is determined on a certain date by the property tax
assessor in each county. In many jurisdictions, the value is assessed annually. The
assessed valuation may or may not be related to the fair market value or the cost value of
the property. In California the citizens were concerned that they would be taxed at such a
high level that property ownership would be untenable in the state. The citizens passed a
statewide initiative in 1976, Proposition 13, that limits the amount property tax can
increase to no more than 2% per year based on the purchase price of the property at the
time the owner purchased the property, as long as the owner still owns the property. As real
estate increases in value, new buyers pay a higher tax based on when their ownership
began, and the value of their purchase at the time. Taxing agencies attempt to thwart this
law to increase their tax revenues.
As an example, property Owner #1 purchased their home property twenty years ago for
$72,000. Their property tax is based on that $72,000 purchase price and may increase over
time at no more than 2% per annum. Californian’s pay on average the lowest property tax in
the nation which averages about 0.8% per year. Their neighbor, Owner #2, purchased their
home for $325,000 and their property tax begins at ($325,000 x 0.008 =) $2,600 per
annum. At this time, owner #1’s property tax is $855.92 per annum, whereas Owner #2 is
paying $2,600 per annum. Next year each owner’s property tax will again increase. Should
Owner #1 sell his property and move elsewhere in the state or out of state, his property tax
obligation will change, and the buyer of his property will pay a higher property tax than the
previous owner as the new owner’s property tax is based on his purchase price.
A benefit to property tax, besides the ownership of real estate, is that the tax paid
annually is reduced from your income for income tax purposes and thus lowers your taxable
income calculation.
In Texas the average property tax is 1.86% on the assessed value of the property (Real
Estate). If a property is worth $250,000 then the property tax (Ad Valorem Excise Tax) is
(0.0186 x $250,000 =) $4,650.00.

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