The purchase of commercial real estate can be a smart investment, but the sheer complexity involved in the taxation of these properties can be a hefty deterrent to potential buyers. You can make a smarter property choice, however, if you understand what the taxes are and how they would apply to your individual business situation.
Every year, homeowners are required to pay property taxes, and the same is true for commercial real estate. What is different is the tax rate and the way these properties are assessed, because a variety of factors, such as income generated, expenses to maintain and the overall condition of the building, can come into play. Incentives can sometimes be found as well, such as a reduction in the tax rate for early payment. Talking with your local tax assessor and/or using resources it may have available will help you gather the information you need to manage this yearly expense effectively.
Local and State Taxes
Cities, municipalities and counties can sometimes levy taxes on commercial real estate. Since this varies broadly across the country, you will need to determine what taxes apply to the property you’re considering. You can look online, work with your realtor or visit your local officials for more specific information. State taxes also vary and are typically centered more around the income generated from the property. When the property is sold, there can also be a state tax on capital gains or losses from the sale. The online information provided by the state where your property is located will provide valuable information and typically have help lines you can call with questions.
Like state taxes, federal taxes on commercial property generally fall into the elements of income and capital gains or losses. Factors such as depreciation, cost of improvements and maintenance, mortgage interest and many others have an impact on both elements. The IRS website provides an exhaustive list of publications, forms and FAQs, as well as a help line to help you understand current tax laws and rules.
Your Tax Picture
Being clear about how you plan to use your property is critical to gaining a clear picture of your tax liabilities. For example, a business owner who owns his or her own property can be taxed very differently than someone who rents a property out to others. Applying this knowledge when you use your various resources, talking with officials or consulting with a tax professional will help you make a confident, smart purchase of commercial real estate.
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