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Home » Brokerage » Sales » Commercial Property Tax: The Complete Guide

We all pay taxes on our homes, purchases, and many other daily essentials. What you might be less familiar with is commercial property taxes. These taxes are much different from residential taxes, and often more expensive.

Knowing what those expenses may be and what benefits can be claimed when paying commercial property taxes is key to ensuring success. Today, get a complete foundation for your commercial property tax education. 

Photo by Nataliya Vaitkevich

Taxes on Commercial Properties: The Four Categories

Commercial properties are subject to a few different types of taxes:

  • Property taxes
  • Federal taxes
  • State taxes
  • Local taxes
  • Rental taxes
  • Sales taxes

The exact types of taxes that apply to your properties depend on location, building type, and a variety of other factors.

If you’re considering purchasing a new investment property, ensure you get a complete outgoings assessment. A building’s outgoings assessment will include taxes paid, so you can get a picture of what will be owed.

The Basics of Commercial Property Tax

Real estate taxes are applied to nearly all properties, so everyone understands bits and pieces of how they work. However, the usual rules apply only to residential properties. How do property taxes apply to commercial properties?

Property tax bills are typically much larger than residential bills. This is often due to the size of the property and its assessed value. The assessed value of an income-generating building will be higher than a residential property, leading to higher tax bills.

Investors and building owners of commercial properties carrying a loan may need to place the funds for property taxes into an escrow account. Alternatively, they will need to provide proof of tax payment to the lender. Lenders require borrowers to do this to ensure they are paying property taxes. If these taxes aren’t paid, it puts the property at risk.

Calculating Commercial Property Tax

To calculate commercial property tax, you must be aware of your local and state tax amounts. Property taxes vary by state, and they can vary quite significantly. There can even be neighborhood-specific tax levies, so you want to be certain of all taxes that apply to the commercial property in question.

Then, you can multiply the property’s assessed value by the applicable tax rate.

For some investors, estimating a property’s assessed value is difficult. The best way to get an early look at assessed value is to look the property up on the state or county tax website. The numbers are usually updated every five years.

Once you have the assessed value, you can make adjustments for inflation, growth, and changes in the market. These factors all affect the assessed value. Once you’re satisfied with the value, multiply it by the tax rate to estimate your commercial property taxes.

Claiming the Benefits of Commercial Property Taxes

There’s no doubt that having a large commercial property tax bill is frustrating when managing a business, but it’s not all bad news. Investors and owners often utilize these benefits to make the most of their tax situation.

Depreciation

Applying depreciation deductions to your taxes is key. The tax code permits property owners to deduct a certain amount of the property’s value each year. This is because the property deteriorates with use, and tax law is written to recognize that fact.

Claiming this deduction helps offset income and reduce the total taxes owed.

Other Deductions, including Pass-Through Deductions

Many deductions related to commercial buildings can be claimed when filing yearly taxes. There may be commercial-focused deductions for green energy savings, local charity support efforts, and other items specific to your building or location.

A pass-through deduction is one of the most common deductions used on commercial property. This deduction sets qualifying LLCs, partnerships, and S Corps to utilize a 20% tax deduction. This applies to rental property income properties, such as retail spaces and building investments. It won’t apply to all commercial investors or building owners, but it may be worth restructuring to take advantage of this tax cut when possible.

There are also tax deferments for commercial properties in specific zones where businesses are being built or boosted. The requirements for these deferments vary but may include 10% reductions on capital gains, profits, and other items.

Photo by Amina Filkins

Deferring Capital Gains Taxes

Another benefit that can be used on commercial property to offset high property taxes is a 1031 tax-deferred exchange. Essentially, the IRS allows investors to not pay capital gains taxes at the time of a property sale as long as the profits are used to fund another investment property. Eventually, those capital gains taxes will need to be paid off, but the deferment enables investors to keep growing their business without a significant cash hiccup.

Commercial Property Taxes: A Tax to Plan For

Planning your expenditure is essential to budgeting, and commercial property tax estimates must be part of that planning. Most local and state officials have already decided on tax percentages for upcoming years so that you can plan your estimated tax payments.

No matter how you decide to handle your commercial property taxes, you must let them slip by unpaid. Doing so will risk your property, business, and personal income.

Acknowledgement – Guest Author

This article was kindly produced and supplied by Guest Editor Emila Smith

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