Property Tax on commercial property is a cost you should not overlook or underestimate when you are preparing to buy or lease a commercial property. Commercial property taxes are more complex and have more serious financial consequences than residential property taxes.
Understanding this tax is essential for business owners, investors, and entrepreneurs who are considering expanding their physical space. It can help you to avoid unpleasant surprises and better manage your bottom line.
This guide will explain the impact of property taxes on leasing and buying commercial property.
What is the property tax on commercial property exactly?
Property Tax on commercial property is a tax imposed by local governments. It includes office buildings and retail outlets as well as warehouses, factories, and mixed-use developments with commercial activity.
Taxes are usually calculated based on an assessed value for the property. The local or municipal tax assessor determines this. The estimated value of your property can be significantly different from its market value. It is therefore essential to know how it has been evaluated.
What is the importance of this before you buy or lease?
Property taxes have a direct impact on your operating costs, whether you’re buying a building or signing a commercial lease. Property taxes are an ongoing annual expense for buyers as long as they own the property. Many commercial leases, especially triple-net leases, pass on this tax obligation to tenants.
Calculating and forecasting property tax on commercial property is part of due diligence. It should not be an afterthought.
Commercial Property Tax: Key Factors that Influence the Rate
When determining the amount of property tax on commercial property, several variables are at play:
- Property in urban zones is subject to higher taxes than properties in rural or suburban areas.
- Zoning regulations: A commercial property located in an area with high demand for businesses may be taxed higher than a similar property in a zone of mixed use or residential.
- The size and use of the property: Larger properties or those used in specific industries (like manufacturing) may be valued differently.
- Age and condition of the building: Recent renovations or new constructions may trigger a reassessment, resulting in a higher tax.
- Local government policies: Every municipality has its tax rates and assessment procedures. Some municipalities offer tax incentives and exemptions to specific businesses.
Estimate property tax before you commit.
It’s essential to calculate your property tax on commercial property before signing any contract to make sure it fits your financial plan. How to do it:
- You can find the most recent tax assessment report at the local tax assessor’s office or on the online database.
- The tax rate is expressed as a percentage.
- Calculate your tax liability by multiplying the assessed value by the tax rate.
If, for example, the value of a commercial property is Rs 2 crore, and your local tax rate is 1.2%, then you would owe Rs 2.4 lakh in taxes each year.
Red Flags You Should Be Aware of
Even the best deals can be derailed if you fail to account for property tax on commercial property. You should be aware of the following:
- Reassessments that occur suddenly after the purchase of a property: In some areas, properties are reassessed at their current market value immediately after the sale. This can result in a significant increase in your tax bill.
- Leases can include clauses that could result in significant tax burdens for you.
- Tax hikes delayed: If you buy in a developing area, the local government may raise taxes soon afterward to fund infrastructure.
Should You Hire A Property Tax Consultant
It can be challenging to navigate the complex world of commercial property tax. Tax consultants or real estate lawyers can assist.
- Understand local tax regulations.
- If necessary, you can appeal a high rating.
- Calculate future liabilities using projected economic or development changes.
- Avoid penalties and interest for unpaid fees.
Although hiring a tax professional may add to your upfront costs, you can save a lot of money by optimizing the tax burden.
Are you eligible for tax incentives and rebates?
Some states and municipalities provide relief to encourage business development. You may be eligible for the following, depending on your property or industry.
- Enterprise zone discounts
- Green building incentives
- Startup incubators concessions
- Historic preservation credit
Ask local authorities for available incentives before you finalize your purchase or leasing. Over time, these incentives can reduce your commercial property tax by a significant amount.
Buyer vs. Lease: Who Pays What?
Who pays the property tax costs? The owner or the renter is a significant confusion. Here’s a quick breakdown:
- All property taxes must be paid by the buyer/owner annually to avoid any legal complications.
- Tenants: Depending upon the lease structure, tenants may pay the entire property tax or only a part of it.
- Triple-Net Lease: The tenant pays the rent, plus insurance, property taxes, and maintenance.
- Gross Lease: The landlord pays all taxes and fees, which are usually included in the rental rate.
It is essential to understand your lease structure to determine if property taxes on commercial property are included in the rent or are a separate cost.
How to minimize your property tax burden
- Negotiate an agreement that limits your tax obligations to avoid sudden rent increases.
- Perform a tax audit before purchasing a product to gain clarity on tax trends in the past and the future.
- Review your assessments regularly and file an appeal if your property appears to be overvalued.
- Consider investing in energy-efficient upgrades to your home. You may be eligible for rebates or tax deductions.
Final Thoughts
Understanding property tax on commercial property goes beyond compliance. It’s also about making informed, wise financial decisions. If you are leasing retail space or investing in property to expand your business, ignoring taxes could lead to unexpected liabilities and a loss of profits.
If you take the time to plan and research your investment or lease, it will be built on a solid foundation. Taxes are inevitable, but they don’t need to be a surprise.
