Commercial Real Estate and Property Tax Regulations

[Julio Gonzalez]

If you own commercial real estate property, you are probably well aware of how much property taxes can eat into your profits. Finding a professional that understands how to help you minimize your tax liability while also remaining compliant can make a big difference.

Let’s first start with the basics of understanding commercial property tax regulations. Property taxes are determined based upon the property’s assessed value that is determined by the public tax assessor. The assessed value includes the building, land and building components. The assessed value is then multiplied by the local tax rate to calculate the amount of property taxes owed.

I’m sure you may be wondering why commercial properties tend to have higher tax rates. One of the reasons is that commercial properties more often have higher price tags. The other reason is that tax assessors may use different methodologies to value the property including revenue potential.

The key items that play a role in the valuation of commercial real estate property include:

• Property Type: A storefront is for example taxed differently than an office building.
• Location: Rural regions tend to be taxed at a lower rate than urban regions.
• Government Spending: When there are different funding needs, it can determine how much of that revenue comes from taxes.
• Market Shift: When the market shifts, property values change which can lead to a change in the assessed value.

Let’s talk a bit more in depth about how the commercial property values are determined. Periodically, the tax assessor office will determine what a property could realistically sell for, known as the fair market value. This could become the basis for taxation.

There are multiple methodologies that are utilized by the tax assessor when determining a property's assessed value and which one is utilized is dependent on age, property type, region and other factors.

The three most common approaches include:

• Cost approach: An estimate of the replacement cost less depreciation
• Income approach: Calculation of estimated potential rental income
• Sales approach: Uses comps of recent transactions on similar properties

Be sure you are leveraging the tax incentives available

1. Identify any applicable tax incentives available for commercial properties - historic tax credits in certain areas, opportunity zones, environmental sustainability, etc.
2. Understand available tax deductions, credits, and rebates - Tax deductions decrease the taxable value of a property, tax credits directly reduce your tax liability dollar for dollar and tax rebates are a refund of taxes paid under certain conditions.
3. Utilize a cost segregation study - Cost segregation allows you to reclassify assets into categories with shorter useful lives, therefore accelerating depreciation and creating tax savings.
4. Leverage energy incentives and deductions - Look into the Section 179D deduction and how you can save on tax by meeting certain standards to make your property more environmentally friendly.

Best practices for commercial real estate owners and monitoring their property tax regulations:

1. Plan proactively
2. Work with a professional to receive guidance on complex regulations
3. Utilize specialized software tools to drive efficiency and compliance.

What questions do you have regarding property tax valuations?