How Do Property Taxes Work in Commercial Real Estate?

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Commercial real estate property taxes are very different from the taxes we pay on a home – for starters, commercial owners must pay several different kinds of taxes compared to residential owners. 

While you can’t avoid paying taxes, there are ways to reduce the amount owed and minimize tax exposure for commercial property owners. To do so, it’s important for investors to understand how taxes impact their properties. As one of Arizona’s premier real estate providers, we’ve highlighted a few areas to consider below.

There are four categories of taxes that commercial real estate investors must be aware of:

  1. Property
  2. Federal
  3. State and local
  4. Rental or Sales Tax

 

Property Taxes

Property taxes are what most people are familiar with because of homeownership. However, commercial real estate owners face a more rigorous process due to working alongside municipalities to determine their appropriate tax rates. This is determined by completing the annual income and expense form that will be used by the local Board of Assessors. The form requires information such as rental income, capital improvements, expenses, and earnings. The Assessors will use this information to set a valuation of which your real estate’s tax rate is calculated.

Federal Taxes

Aside from property taxes, commercial real estate investors who experience generated income from their properties will need to pay income tax on the net income or profit. Keep in mind that security deposits from tenants that are held by the owner do not count as income because it is held in security by the landlord and is meant to be returned to the tenant. 

State and Local Taxes

If your state taxes businesses, you’ll have to pay income tax on your commercial property income. As with Federal taxes, investors can deduct expenses and only pay tax on the net profit based on guidance from a tax professional. Furthermore, they should count State income tax as one of the expenses when determining the amount of rent to charge for use of the commercial property. 

Rental and Sales Tax

Many states and cities collect a percentage of the monthly rents commercial real estate investors receive from tenants. Unlike property taxes or the others mentioned, a rental or sales tax is based on gross income, instead of net income. As a result, it’s fairly common for commercial real estate leases to have a provision that allows the owner to add a rental tax to be paid by their tenants. This is the only rental or sales tax a property owner will owe, as tenants will be responsible for paying their own state and city taxes directly. 

 

Enhance Your Portfolio with Plaza Companies 

Founded in 1982, Plaza Companies has been one of Arizona’s premier real estate firms specializing in leasing, management, construction, and development. Our large range of commercial spaces allows for flexibility and efficiency for any investor to expand their investment portfolio. Contact us today to learn more about our properties and what we can do for you.

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