Property taxes can have a significant impact on the profitability of a commercial building. Landlords and investors must understand – and plan for – these costs if they want to maximize their net operating income (NOI). The Internal Revenue Code provides a wide range of deductions and credits that can help reduce your overall tax liability.
While some tax breaks apply only to individuals and families, others are available to everyone – including business owners. One significant benefit of owning a commercial property is the ability to deduct expenses related to the property, such as repairs or depreciation. However, there may be certain restrictions on these deductions that could affect your bottom line. Learn more about commercial property taxes here.
Commercial Property Taxes
Commercial property is generally used for business purposes, such as a restaurant, office space, or industrial warehouse. Commercial real estate includes both land and buildings on that land. The most common types of commercial property are:
- Office buildings and other facilities with similar structures (for example, retail stores)
- Apartments or similar living spaces leased to tenants
- Warehouses and other storage facilities
Commercial properties, like residential properties, are taxed at the same rate as a percentage of their assessed value. While this may seem straightforward enough, there are actually some differences in how commercial property taxes are calculated.
One key difference is that commercial property values tend to be higher than residential properties and thus have higher tax rates. This is because municipalities tend to rely on commercial property taxes more heavily than residential property taxes to fund public services such as police and fire departments.
The Major Difference Between Commercial And Residential Property Taxation
Commercial property taxes are based on a property’s fair market value (FMV), which the county tax assessor’s office determines. The FMV is usually a higher number than the purchase price of the property because it reflects not only the purchase price, but also any improvements made over time.
The tax rate on commercial properties is a function of two factors: the property’s value and its classification. The classification depends on the type of business conducted by the owner of the property (e.g., retail or service). In most states, there are three types of classifications: personal-use, business-use, and industrial.
Personal-use properties are generally those used to generate passive income (such as rental income). Business-use properties are those used by a business entity for conducting its operations (such as retail stores). Industrial properties are those used in manufacturing or other industries that require heavy machinery or equipment such as factories or warehouses.
Commercial Property Deductions
Like any other type of tax, certain deductions can be taken concerning commercial property taxes. These include:
- Interest Expenses: Interest paid on loans used to purchase your property is also deductible from your taxes. These interest payments are calculated based on the amount borrowed, how long it took to repay the loan, and prevailing market interest rates at the time of repayment.
- Utility Bills: Utility bills such as electricity, gas, and water are typically deductible from your taxes as long as they’re related to maintaining or operating your business. You should keep all receipts for these charges to prove their legitimacy when filing tax returns with the Internal Revenue Service (IRS).
- Depreciation: This is a deduction allowed for commercial and residential properties. However, because a commercial building is used more intensively than a private home, the amount of depreciation allowed for a commercial property will generally be greater than for an equivalent home (depending on which one is sold first).
Commercial properties are very similar to residential properties in taxes; they may have some advantages over residential properties because they’re considered investments or income-producing assets.
We hope you enjoyed learning about the unique tax situation for commercial properties. We know that it can be a complex topic, but we hope this article helped clear things up for you.
Have questions about commercial property taxes? The Ray Tax Group is Texas’ Premiere Property Tax consulting firm. We are a team of seasoned professionals, licensed attorneys, real estate agents, and property tax consultants with knowledgeable support staff.
Contact us here to see how we can help you save.