10 hidden costs of commercial real estate - part 3
In my first article, I highlight three of the lesser known costs of commercial real estate we sometimes forget about: city business license fee, sewer fees and environmental cleanup fees. The second article discussed other costs: capital expenditures, commissions & readying the space, vacancies, prepayment penalties and building code upgrades. In my third article of the series we will talk about two costs, both tax related: special assessment districts and income tax misconceptions.
Special assessment districts
Everyone who owns real estate is aware of property taxes. In addition to the one percent “ad valorem” general property tax based on the Proposition 13 property value there could also be several voter approved taxes, direct charges from taxing agencies and special assessments & fees included on your tax bill.
This information can be viewed on the property tax bill or if you are purchasing a property on the preliminary title report. Keep in mind if you are purchasing a property it will be reassessed to current values and most likely your tax bill will increase from what the current owner is paying.
The special assessments could include the Downtown Napa Property/Business Improvement District if your property is located downtown or the Glassy Winged Sharp Shooter for agricultural property, but there are many, many others. Oftentimes, property owners may actually vote to assess themselves with a special fee that could go towards improvements in the area, parking garages or group marketing efforts.
Income tax misconceptions
The down payment for the purchase of investment property is not a deductible item as it is part of the basis of your property. You will still be able to write-off the amount indirectly through depreciation. After deducting the land value, you write-off the balance over 27.5 years for commercial property or 39 years for residential.
Closing costs are not directly deductible in the year of acquisition. Again, these expenses become part of the basis and you take the write-off through depreciation.
Loan points are not all deductible up front in the year the loan was secured. For investment property you would take a prorated portion of the loan points over the term on the loan as your deduction.
When you sell your property you do not deduct your loan balance from your basis to determine your capital gain or loss. The only values used to determine your capital gain or loss is the sales price less selling costs minus your basis. You pay capital gains tax on this amount.
These above tax misconceptions are very simplified as there are many nuances to each. You are always encouraged to consult with a CPA prior to making any change in your real estate investment portfolio and have him or her review your escrow documents for your current year tax return preparation.