Property Tax Commercial vs. Residential

Posted by Jill Noelle Olandria on Feb 20, 2017 11:30:00 AM

In the United States, local governments that impose property taxes classify property into two major categories, namely, commercial and residential. The distinct differences between the two will influence their assessment methods, their fair market and assessed values, and their property taxes. Let’s then take a look at property tax for commercial versus residential. 

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Different Definitions

The main difference between commercial and residential property lies in their primary use. On one hand, residential property is used for residential purposes – as a home or abode for a single individual, for couples, and for families. These include single-family detached homes, duplexes and triplexes, townhomes, and condominium units which can either be owner occupied or rented.

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On the other hand, commercial property is used in revenue generation. The revenues can come in several forms including rents, retail sales, and professional services, among others. The property can include various uses such asapartments, manufacturing (i.e., factories), retail and malls, even farmland.

Different Valuation Methods

The differentiation between the two is crucial in the determination of property tax for commercial versus residential. Let’s start with the valuation methods used in assigning fair market and assessed values for commercial and residential property.

On one hand, the local assessors determine the fair market value of a residential property based on factors including:

  • Nature of the property
  • Size and location
  • Features like number of bedrooms, baths,and age of improvements
  • Desirability of the property, such as proximity to schools and offices, updating, landscaping, and any detracting features
  • Restrictions on the property, such as building code restrictions and easements
  • Actual utility of the property, ranging from conformity to today’s building and layout standards to drainage
  • General economic conditions, such as sales prices of comparable property

You will observe that some of these factors are subjective in nature, such as the desirability and utility of the property. You will likely come to an agreement with the local assessors on the objective factors, such as the size, market area, and other amenities.

On the other hand, the local assessors also use many the abovementioned factors in the valuation of commercial property but with an added factor – income earned. The fair market value of a commercial property is usually calculated using the income approach. The income approach uses present values of the expected income streams from the property to develop a value. The local assessors often combine objective and subjective datato arrive at the fair market and, thus, assessed value for a commercial property.

Many owners justifiably feel that their commercial property are over-valued and, thus, overtaxed. There are many reasons for the over-valuation. For example, the subject commercial property was compared to the surrounding commercial properties, which earn higher incomes than the subject property. The rising sale prices of the surrounding commercial property due to their superior performance is also an issue.

And then there’s also the difference in the tax rates and deductions allowed on property tax for commercial versus residential. You and your tax consultant should consider these factors in the decision to file an appeal against the assessed value made by the Tax Assessor’s Office. 

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