Property taxes can significantly impact real estate owners and businesses. Business owners, property investors, and real estate experts need to understand how property taxes work, how they are calculated, and how to reduce them.
This guide simplifies the challenges of property taxes and provides practical tips for managing and reducing your tax obligations.
What are Property Taxes?
Local governments require real estate owners to pay property taxes annually. These taxes are commonly used to finance public amenities such as:
- Schools
- Law enforcement
- Infrastructure
The local government determines the tax rate for a property, a calculation based on its assessed value that ensures fairness and equity.
Entrepreneurs must pay property taxes for both commercial and residential properties. This applies to running a physical store or leasing out commercial real estate, making property taxes a mandatory financial obligation for all entrepreneurs.
How are Property Taxes Calculated?
Property taxes are calculated by multiplying the assessed value of your property by the local tax rate. We can simply note down its formula:
| Property Tax = Assessed Property Value x Tax Rate |
However, assessing the property’s value can be complex. Local tax assessors consider various factors, such as:
- Property market value
- Enhancements undertaken
- Rental or commercial income
Factors Influencing Property Tax Rates
The cost you incur is determined by a variety of factors, including:
- Location: Property taxes vary by state, county, and municipality. Cities often have higher tax rates than rural areas because public services are more needed.
- Property Type: Commercial properties tend to have higher tax rates than residential properties.
- Property Improvements: Improvements to your property may raise its elevated value and, as a result, your tax assessment.
Property Tax Exemptions and Reductions
One way to lower your property tax is to take advantage of exemptions and reductions available for specific properties or property owners. Here are some common exemptions available:
Exemption 1: Homestead Exemptions
Business owners who work from home or utilise part of their property for residential purposes in certain areas may be eligible for a homestead exemption, which reduces the property’s taxable value.
Exemption 2: Business Use Exemptions
Some local administrations provide tax breaks for properties used by particular kinds of businesses, such as non-profit organisations or eco-friendly energy projects.
Exemption 3: Depreciation for Rental Properties
Investing in rental properties could decrease the taxes you owe over time through depreciation deductions.
The City Borough Housing guide provides practical resources and steps to lower your rental property tax expenses. By using these resources, you can better understand the exemptions offered in your locality and actively work towards reducing your tax obligations.
Tax Strategies for Reducing Your Property Tax Burden
While property taxes are unavoidable, several strategies exist to manage and reduce your tax burden.
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Challenge the Property Assessment
You can challenge the assessor’s valuation if your property is high. Collect proof, such as recent sale prices of similar properties or errors in the assessor’s assessment procedure, to strengthen your appeal.
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Understand Local Tax Laws
Tax regulations differ greatly depending on the location of your property. Business owners must stay up-to-date on any new tax breaks, assessments, or regulations implemented by local authorities.
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Request a Property Reassessment
If your property’s market value drops, you can ask for a reassessment to reduce your tax amount. This is beneficial in times of economic decline or in regions experiencing decreasing property values.
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Tax Abatement Programs
Several local governments provide tax abatement programs that decrease or waive property taxes for a limited time for new:
- Developments
- Renovations, or
- Businesses moving to certain areas.
Exploring these changes could result in significant cost reductions.
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Leasehold Improvements
If you rent a property and have to pay property taxes as per your lease agreement, try to discuss with the landlord about reducing your portion of tax responsibility in return for any enhancements or investments you’ve made to the property.
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Tax Credits for Sustainable Properties
Several states provide tax credits for making energy-efficient or environmentally friendly upgrades, like installing solar panels or constructing LEED-certified buildings. By decreasing the taxable value of your property, these credits can help lower your total tax bill.
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Take Advantage of Deductions
According to the Tax Foundation, in 23 European countries out of the 28 with property taxes, businesses can lower their taxes by subtracting their taxes on their properties or land from their overall business income. This can help companies invest more money to grow their operations.
Managing Property Taxes as a Long-Term Strategy
For business owners, handling property taxes is not a single event but a continuous plan. Consider these essential tips to ensure compliance with your business’s property tax obligations:
Tip 1: Keep Detailed Records
Keep accurate records of any changes or improvements you make to your property. These records could be really important if you apply for exceptions or dispute property assessments.
Tip 2: Regularly Review Tax Bills
Keep in mind that property evaluations can sometimes have mistakes. It’s a good idea to check your tax bills every year to ensure that any discounts or special savings you’re eligible for have been applied correctly and that the calculations are precise.
Tip 3: Consult with a Tax Professional
Although you might feel inclined to manage property taxes independently, seeking advice from a tax expert can reveal more opportunities to lower your obligations and guarantee adherence to local tax regulations.
Conclusion
Property taxes can be a major cost for business owners. Knowing how property taxes are calculated, possible exemptions, and good strategies to manage them is essential for financially stabilising your business. Stay updated, take the initiative to manage your property taxes effectively, and retain more money in your business.
