How Are Taxes Calculated On Commercial Properties For Lease?

Owning and leasing commercial property is extremely profitable and it boasts of an extremely high rate of return. The return, however, is calculated after considering the tax the property owner pays to state authorities. In most cases, tax is levied on the adjusted current value of a commercial property. The taxation is usually managed by local government authorities, who generally calculate the tax to be imposed using the Income Approach. Here is how the authorities assess the tax to be imposed upon the property.

For the assessment of tax, the authorities determine the current value of the commercial property. In order to do this, they invite statements of income as well as that of expense from the property owner.

Income statement

The property owner needs to submit statement of all income earned from the property in the year under consideration. A commercial property for lease earns its income primarily from monthly rent, which are to be divulged in the details of the statement.

Expense Statement

Next, the owner needs to submit a statement of all the expenses incurred in the year by the property. The expenses will include management fees, associated commissions, legal fees, marketing costs, repairs and replacements, insurance, payments made for supplies and maintaining utilities etc. Understatement of expenses is never a good idea, as it will result in a higher valuation of the property, which would in the imposition of a higher tax. It is advisable that all the expenses related to the property are expressed in the statement.

Cap rate

From both the aforementioned statements, the net income from the property is calculated by subtracting the total expense from the total income. Now, let us assume the net income for a year to be $100,000. Now, the value of the property is assessed using the cap rate. The cap rate is a standard rate announced by the authority which varies according to the type of the property. Let us suppose the cap rate to be 8%.

Now, the cap rate would be adjusted with the proportion of tax paid in the previous year. If, say, a tax of $12,000 was paid, the proportion would be $12,000/$100,000=0.012%. Hence, the adjusted cap rate is 0.08+0.012=0.092%. This method is known as loading the cap rate.

Valuation of net worth

Since, the net income was $100,000 and the tax paid was $12,000, the adjusted net income would be $112,000. Therefore, the net assessed value of the property in the present year would be $112,000/0.092= $1,217,391.30.

Expected Tax

Let us assume that the tax levied in the area the commercial property is located in is $12 for every $1000 of assessed value. Hence, the expected tax would be $1,217,391.30*$0.012=$14,608.69.

This is the general procedure for the evaluation of tax for commercial property. Property management services like Madison Management undertake various tested tools to forecast taxes as accurately as possible for the commercial properties they manage.