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Buying Business Property? Analyze State Taxes Before Closing the Deal

 

commercial property tax

There are a number of different reasons you may choose to purchase real property (land and buildings) for commercial purposes. It may be a revenue-generating residential property, office space or brick-and-mortar storefront.

While the latter are usually leased, some business owners may choose to purchase title to meet business objectives. Analyzing whether buying property is a sound financial decision, however, is complicated by the number of potential commercial property taxes that are payable on an ongoing basis.

How Is Commercial Property Taxed?

Just like with homes owned by individuals, commercial properties are taxed on their assessed value, usually by the local governmental authorities. For cities, property taxes are a major source of revenue, paying for everything from schools to public transit.  At the state level, the personal property of businesses, such as inventory and equipment, may be taxed. Real property typically is not. However, if you are making revenue directly from the real property, your business will pay state and federal income taxes on this revenue.

What Is the Rate of Taxation?

An in-depth analysis of commercial property taxes done in 2015 compared all 50 states and their relative tax burdens. Since municipalities do most of the taxing, the analysis compared the average tax paid by commercial properties in the largest city in each state with urban and rural regions. Overall, property in large cities was taxed at a significantly higher rate than in rural areas.

Detroit had the highest effective rate for properties worth $1 million with $200,000 in fixtures. Detroit’s taxation rate was 4.13 percent, just ahead of New York City at 3.96 percent. That’s a great deal more than the cities as the lower end of the list of the 53 states surveyed. Honolulu, Seattle and Cheyenne had the lowest tax rates at 0.91 percent, 0.88 percent and 0.63 percent, respectively, for properties of the same value.

Should You Choose to Buy Out of State?

These wide variations in city-levied taxes may make you wonder if it makes sense to buy a property elsewhere if your home state may be too expensive. If you have the option to buy a commercial property elsewhere, where the municipal taxes and the state income taxes may be lower, that may be a sound choice.

However, you will have to take into account the cost of hiring a property management company to look after the building locally. Ideally, you’ll also make regular on-site visits to the location, which will cost you time and money in travel. These are added expenses you must factor in when deciding how to reduce your tax burden.

Factors to Consider When Crunching the Numbers

In each case, it’s essential to fully understand how the location and use of your real property will affect your business’s tax burden, not only at the time of sale but over the life of ownership. Unlike inventory, which you can sell off at fire-sale prices to reduce your personal property tax burden, you will likely have to hold on to a piece of real estate for years.

To figure out the true cost of taking on the asset, take it step by step. Discuss with an accountant or taxation expert how you will be taxed for the value of the asset and any income that you earn from that asset.

Systematically analyze the taxes at the local, state and federal level.  Remember, you can take expenses off your taxable income, so working with a qualified financial expert will help you ensure you’re making the calculation correctly.

Just like with any business decision, information is key to making practical choices. Instead of jumping in on a property purchase, learn as much as you can about how holding the asset will add to your tax burden. In some cases, a bit of adjustment in your overall financial planning is all that’s needed to have the deal make sense.

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