Real Estate Tax Calculation: A Comprehensive Guide to Calculate Property Taxes for Commercial Real Estate

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Property taxes can be one of the largest expenses associated with a commercial real estate investment. Accurately calculating these taxes is crucial for effective real estate investment analysis. In this guide, we will break down the process of calculating property taxes in five simple steps that can be applied to any location. Understanding these steps will not only help you make accurate projections about the future income of your property, but also aid in determining its value and potential return on investment. So, whether you are a beginner looking to break into the real estate industry or an experienced investor, this guide is for you.

Step 1: Determine if your property value will be reassessed upon sale
Upon purchase, your property may be reassessed for tax purposes. This reassessment can result in a significant increase in property tax payments. Properties that have not been sold for a long time may have a low tax basis, which can dramatically increase once the property is sold. It is important to find out if your property will be reassessed and if so, gather information about the potential impact on your taxes. This information can typically be found on state or county websites, or by contacting the local tax authorities.

Step 2: Calculate the assessed value as a percentage of the sale price
In some states, the assessed value of a property is equal to 100% of the sale price. However, in other states, this value can vary, ranging from 80% to as low as 10-20% of the sale price. It is crucial to accurately determine the assessed value, as it directly affects the amount of property taxes you will be liable for. Real estate brokers can provide some guidance on this, but it is best to consult state or local authorities for the most accurate information.

Step 3: Determine the millage rate or property tax rate
The millage rate is the percentage of the assessed value that is used to calculate property taxes. In most cases, the millage rate is relatively consistent and balances out the assessed value. For example, if a property is reassessed at 100% of the sale price, the millage rate might range from 1% to 1.25%. However, if the property is reassessed at a lower percentage, such as 40% of the sale value, the millage rate can increase to 3-4%. Knowing the millage rate is essential to accurately calculate your property taxes.

Step 4: Account for fixed charge assessments
Fixed charge assessments are additional fees that are not directly related to the assessed value of the property. These assessments are typically used to fund local services such as schools, fire departments, water, and sewer. They can be charged on a per-unit basis for multi-family properties or on a per-square-foot or per-building basis for commercial properties. It is important to factor in these fixed charge assessments to accurately determine your total property tax burden.

Step 5: Consider the annual property tax growth rate
In areas where property values are not reassessed upon sale, it is crucial to assume an annual property tax growth rate. Some states have caps on annual tax increases. For example, in Arizona, the annual cap on property tax increases is 5%. However, in states like California, where property taxes are reassessed upon sale, the annual cap on tax increases is 2%. Knowing the rules and regulations regarding annual tax increases in your area is important when projecting future property taxes.

It’s important to note that performing these calculations is essential not only for analyzing a potential acquisition but also for estimating the selling price of the property. If the property is reassessed upon sale, the buyer will likely have a different property tax assessment based on the updated value at that time. Therefore, it is crucial to incorporate accurate tax calculations into both your acquisition and sale value analysis.

Calculating property taxes is a critical aspect of real estate investment analysis, especially for commercial properties. By following the five-step process outlined in this guide, you can accurately project your property tax expenses and make informed investment decisions. Remember to determine if your property will be reassessed upon sale, calculate the assessed value as a percentage of the sale price, determine the millage rate, account for fixed charge assessments, and consider the annual property tax growth rate. Implementing these steps will help you calculate property taxes effectively and avoid any surprises in your real estate investment journey.

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