Most commercial establishments have recently begun to reopen as restrictions ease in the last quarter of 2021. And with the increasing demands for business spaces, it’s no surprise that the commercial real estate industry is picking up, along with all the other sectors worldwide.
Commercial property owners must do their best to keep up with the exciting changes while ensuring they’re not lax on their tax responsibilities or, even worse, dealing with surprise property tax costs.
What is a commercial property?
Any real estate space and structure used for commercial purposes or business falls under the category of commercial property and is liable to commercial property tax.
Commercial buildings, office spaces, warehouses, medical centers, and retail stores are some of the most common examples of what counts as commercial real estate.
Apart from purpose, another significant difference between a commercial and residential property is its tax. Ownership comes with responsibilities and costs, so knowing all potential fees for your commercial assets is best.
What is commercial property tax?
Property tax or ad valorem tax liability is a payment obligation owed by a property owner to the state or local tax authority. This means commercial property tax is a possessor’s regular responsibility for their registered commercial assets.
Commercial tax bills depend on the assessed value of every property. Your tax liability may be lesser or greater than the current market value of the assessed property.
It should also be noted that property taxes are considered a primary source of revenue for most local governments; therefore, it is a necessary expense that any property owner must be aware of. Commercial tax property obligations will continue as long as you own such a property.
How is commercial property tax calculated?
Knowing how to calculate property taxes is essential. But why exactly is that? Before jumping into the specifics of commercial tax liabilities, one must first understand where it all starts— your property tax assessment.
Property Tax Assessment
Property tax assessment is a process carried out by a government-designated tax authority to evaluate a property’s assessed value to determine how much an owner should be billed with.
This assessment is the main basis for your property tax bills. However, that’s not all. Final calculations would also depend on the current property tax rate and any exemptions you qualify for.
While property tax assessments are set on certain dates, the specifics could vary in different jurisdictions. Most areas assess tax property value every year. In others, value is estimated every other year or on another schedule, or if the asset is transferred.
Property Tax Rate
Property tax rate, also referred to as multiplier or mill rate, is a percentage used to multiply the assessed value of your property to determine your tax bill and is often expressed in decimal form.
Property taxes are used for various community needs, such as public schools, libraries, parks, recreation centers, community colleges, police and emergency response services, local government employment funds and services, road construction, community improvement, etc.
Each item has a preset percentage that your property’s assessed value is multiplied with; each makes up a part of your final bill. Taxes owed for each item are totaled to determine the final commercial property tax bill.
A decrease in the overall assessed value of your commercial property could happen if you are an owner-occupant or what others call a homestead exemption.
The assigned assessment officer will consider a few exemption factors and deliberate if these are applicable to said property ownership.
Exemptions from property tax may sometimes apply when buildings or land are used for religious reasons. This is why it’s imperative to clarify a commercial asset’s purpose.
Other factors that affect your property tax bill:
- The estate’s geographical details, size, age, and construction type
- The purpose of your property (residential, agricultural, commercial, so on)
- The increase or decrease of the property’s assessed value and the property tax rate by tax authorities
- The recent real estate trends in your area directly affect any component when the tax rate is totaled.
Commercial Property Tax: 5 Common Myths Debunked
The commercial real estate industry views property taxes as a crucial factor in regulating the industry. Local authorities pay strict attention to taxes levied, particularly for retail assets. As an owner, managing such obligations help avoid costly issues and helps prevent surprise costs.
Consequently, familiarizing yourself with the most prevalent property tax misconceptions will help make improved decisions moving forward.
Market value equals assessed value.
Truth: Market value is how much a property would be leased or sold based on the current markets. At the same time, the assessed value is the valuation placed after an assessment by a sanctioned officer to determine the annual property tax.
Assessed value considers various factors, such as the quality of the property and its purpose. In some jurisdictions, market conditions and value are essential percentages contributing to the final assessed value.
Therefore, taxpayers must determine the specific valuation parameters for their commercial property.
2. Assessors determine the final annual value of the property tax
Truth: Property tax rates are set not by assessors but by the local government based on the required funds for new and ongoing governmental services. The community’s local, educational, and other governmental services are funded by property taxes from both commercial and residential real estate owners.
Assessors conduct their assessments based on the tax rate determined by the local government.
3. Local authorities have full control of property tax rate movements
Truth: Just because local authorities determine the tax rate based on the community’s current funding needs, they cannot decide on the actual rate however they like.
An equalization process is performed annually to ensure that taxes levied are justly apportioned among municipalities. This is a necessary procedure done by the assigned bureau of the government and involves a detailed study on real estate sales throughout the area, a comparison of said sales reports with local property assessments, and an adjustment on the increase or decrease of the property’s local assessed value to reflect proportionality to other jurisdictions.
4. Commercial property tax bills can be appealed at any time
Truth: Unfortunately, property tax bills can’t be challenged once it’s received. There is a set window when this could be allowed, usually after receiving your assessment notice.
Owners will likely receive their assessment notice in January, and property taxes are due in February. So you have until January 31st to ready and file your property assessment appeal. Your property assessment notice is mailed, so be sure to check regularly.
Filing an appeal does NOT increase your commercial property tax, nor does it affect your assessment. So, owners are encouraged to file an appeal should they find their results imbalanced.
5. Property tax assessments are always fair.
Truth: Mere compliance to a tax obligation and actively knowing what said tax obligation entails are two very different things. Just because there is a systemic approach to determining your property tax bill does not mean it’s consistently fair.
Property taxes change every year and, therefore, are not fixed. Both owners and local authorities must work together to review the assessed value and update it for accuracy. Changes must be made should there be any errors.
Knowing what you can about commercial property taxes saves a whole lot of trouble and money. No one wants to spend more than what’s necessary. And the first step is to be acquainted with how commercial property tax is calculated in your area, what factors are at play, and which particular valuation parameters are used for assessment.
If you feel like this is too much to handle now, and you’re unsure what next steps to take, getting in touch with a tax consultant specializing in commercial property taxes will help. And one who already has friendly relations with the local government will surely be a plus.