When it comes to commercial real estate tax, one size doesn’t fit all. The tax implications vary depending on the type of property you own. Understanding these nuances is crucial for anyone investing in or managing commercial properties.
Let’s look at the different types of commercial properties and their tax implications so that you can make a more educated decision before tax season rolls around.
1. Office Buildings
Office buildings are somewhat stable, although, in past years, they’ve become less so thanks to the new push toward remote work.
Pros
- Stable Income: Office buildings usually have long-term leases, providing owners with a consistent revenue stream as long as the offices are occupied.
- Low Turnover: Corporate tenants prefer stability and are less likely to move frequently, reducing the cost and time associated with tenant turnover.
- Simpler Management: Compared to retail space, for example, the complexity of managing an office building is generally low.
Tax Considerations
- Depreciation: The IRS allows the depreciation of office buildings over a period of 39 years, which can help offset income.
- Operating Expenses: You can usually deduct utility costs, maintenance and insurance from taxable income.
- Property Tax: Often calculated based on the assessed value, which includes both the land and the building.
2. Retail Spaces
Speaking of retail spaces — any business with a physical location for customers to visit — let’s look at the pros and cons there.
Thanks to the high cash flow unique to retail, a few special circumstances may apply:
Pros
- Income Potential: Retail spaces often command higher rents per square foot than other property types.
- Triple Net Leases: Many retail tenants opt for NNN leases, which cover property taxes, insurance and maintenance costs all in one. This is a simplifying relief for store owners.
Tax Considerations
- Percentage Leases: This is when the tenant offers a cut of their profits for a lower lease price. Common in retail, this type of lease affects how they might report income.
- Capital Improvements: Upgrades to the property to attract higher-quality tenants are capital expenditures that can depreciate over time.
- Common Area Maintenance (CAM) Charges: You can pass these on to the tenants, but they must be accounted for carefully in tax filings.
3. Warehouses and Industrial Spaces
Warehouses and other industrial buildings are lower maintenance, but can come with warnings.
Pros
- Lower Operating Costs: Typically, warehouses are less expensive to manage than retail spaces or office buildings.
- Stable Tenancies: Industrial tenants usually sign long-term leases.
But those lower costs and fewer changes have some tax consequences, both good and bad.
Tax Considerations
- Zoning and Land Use Taxes: Industrial zones may have different tax rates or incentives.
- Utility Costs: Energy consumption might qualify for certain tax deductions or credits.
- Capital Expenses: Major repairs and improvements can be capitalized and depreciated over their useful life.
4. Multi-family Units
Apartments, apartment homes, condos, du- and triplexes — there are many things we could call a multi-family unit. It simply means that more than one family can live there.
Pros
- High Demand: People always need a place to live, making multi-family units a reliable investment.
- Revenue Diversification: Multiple tenants means losing a single tenant has a less drastic impact on revenue.
While there are plenty of responsibilities that come with owning housing properties, there are some intriguing tax benefits:
Tax Considerations
- Depreciation: Multi-family buildings can be depreciated over 27.5 years.
- Pass-Through Deduction: Some multi-family property owners may qualify for a 20% income deduction under current (2023) Texas pass-through tax rules.
5. Mixed-Use Properties
This classification refers to any building that doesn’t fit easily into one of the above categories or combines two or more of them in the same building.
Pros
- Diverse Income Streams: These properties combine retail, office and sometimes even residential spaces.
- Risk Diversification: If one sector suffers, the others might still perform well. This gives you cash flow and a safety net to try something new.
Those mixed uses also have mixed tax implications a property tax consultant can help you understand:
Tax Considerations
- Split Rate Taxation: Different parts of the property might be subject to different tax rates or depreciation schedules.
- Allocating Expenses: Care must be taken to allocate expenses proportionally between the various use cases for accurate tax reporting.
Hegwood Group: Your Tax Experts As You Grow
Owning commercial property is a significant investment with opportunities and challenges, especially in taxation. Understanding the different tax considerations for each type of commercial property will help you plan more effectively and hopefully save some money.
Real estate tax laws are subject to change, and the nuances can be complex. It’s advisable to consult the experts in commercial properties to ensure that you comply with current laws and take full advantage of available deductions and benefits. Hegwood Group stands prepared to help you figure out your tax strategy and implement it starting from our first consultation. Please contact us today and we’ll begin working hard on your behalf!
