Guide to Commercial Property Taxes

Commercial real estate owners pay property taxes much the same way homeowners do, but the similarities end pretty quickly. There are more types of taxes to account for, the bills are generally larger and the calculations behind them can be harder to follow. On the other hand, commercial real estate also comes with some significant tax advantages that residential property simply does not offer.

Whether you are a first-time investor or a seasoned owner looking to brush up on the basics, understanding how commercial property taxes work is an important part of protecting your bottom line. Below, we walk through the four main types of taxes that apply to commercial property, how those taxes are calculated and the key tax advantages available to commercial real estate owners.

Note: This article is intended as a general educational resource and does not constitute tax, legal or financial advice. Tax rules change, and individual circumstances vary. Consult a qualified tax professional before making decisions based on the information below.

Key Takeaways

• Four Tax Categories: Commercial property owners face property taxes, federal income taxes, state and local income taxes, and rental or sales taxes. Property tax is typically the largest.
• How Property Tax Is Calculated: Assessors estimate market value using sales comparisons, replacement cost, or income analysis, then apply an assessment rate and mill levy to determine the bill.
• You Can Contest Your Assessment: Owners typically have a 30- to 60-day window to challenge a property valuation before the tax bill is finalized.
• Major Tax Advantages: The One Big Beautiful Bill Act (OBBBA), signed into law in July 2025, permanently restored 100% bonus depreciation, made the Section 199A pass-through deduction permanent, and established the Qualified Opportunity Zone program as a lasting feature of the tax code.
• 1031 Exchanges Survived Intact: Despite repeated proposals to limit them, Section 1031 tax-deferred exchanges remain fully available with no caps on deferral amounts.

Different Types of Taxes on Commercial Real Estate

Taxes on commercial real estate generally fall into four categories. While property tax tends to be the most visible, the others can add up quickly and are worth understanding from the start.

Property Taxes

Real estate property taxes are the ones most people are familiar with. A property tax levy on commercial real estate works similarly to property taxes on a home: the local government assesses the value of the property and charges a tax based on that assessment.

The key difference is scale. Commercial properties are typically worth more than residential ones and they generate income, which means the tax bills tend to be significantly higher. Some commercial real estate lenders require borrowers to make monthly property tax payments into an escrow account, while others simply ask for proof that the annual or semi-annual bill has been paid.

Federal Income Taxes

Commercial property owners are required to pay federal income tax on the net income from the property, not the gross income. That distinction matters, because it means investors benefit from accurately tracking and maximizing all allowable operating expenses to reduce their taxable income.

Tenant security deposits are not counted as income when received. A deposit sits on the balance sheet as a liability, since it is meant to be returned to the tenant at the end of the lease. However, if a tenant defaults and the deposit is not returned, it can be reclassified. If the money is applied toward repairs or collections expenses related to the vacancy, it effectively becomes a deductible expense rather than taxable revenue.

State and Local Income Taxes

Some states and local municipalities also levy taxes on the net income that commercial property generates. These taxes are generally calculated in the same way as federal income taxes.

When setting rental rates, commercial property owners should factor in the total tax burden across property, federal, state and local taxes. By building these costs into what tenants pay, the tax expense is effectively passed through, reducing the owner’s out-of-pocket obligation.

Rental or Sales Tax

Many states and cities collect a percentage of the monthly rent that landlords receive from tenants. Unlike income taxes, rental or sales tax is calculated on gross income rather than net.

Commercial leases should include a provision allowing the owner to add the applicable rental tax onto the tenant’s monthly payment, regardless of whether the lease is structured as a gross, modified gross or triple net (NNN) arrangement. If you are not yet familiar with these lease types and how they affect your costs, our guide to finding office space for your small business covers them in detail. For example, if a tenant’s monthly rent is $1,000 and the combined state and local rental tax rate is 2.5%, the tenant would pay $1,025 per month. The landlord then remits the $25 to the relevant taxing authority.

This only covers the rental or sales tax owed by the building owner. If the tenant’s business also collects sales tax from its own customers, that is a separate obligation the tenant handles directly.

How Are Commercial Property Taxes Calculated?

Of the four types of taxes on commercial real estate, property tax is usually the largest and often the most confusing. The process involves several steps, and the terminology can trip up even experienced investors.

Assessed Value vs. Appraised Value

An important distinction to understand up front: assessed value is not the same thing as appraised value. A property is appraised to determine its fair market value, typically for the purposes of a sale or financing. It is assessed to determine its value for taxation purposes. Assessed values are usually much lower than appraised values.

How Assessors Determine Market Value

Before arriving at an assessed value, tax assessors first estimate the market value of the property. They may use one, two or all three of the following methods.

Sales evaluation. The assessor looks at recent comparable sales of similar properties within the county, adjusting for differences in condition, improvements and overall market trends.

Cost method. The assessor calculates what it would cost to replace the property, factoring in depreciation and the current cost of materials and labor.

Income method. The assessor estimates how much net income the property would generate if it were fully leased, accounting for vacancy, operating expenses and a reasonable rate of return. Some counties require commercial property owners to submit an annual income and expense form to support this method.

From Market Value to Assessed Value

Once the market value has been determined, the assessor multiplies it by an assessment rate, a uniform percentage that varies from county to county. For example, if the market value of a commercial property is $10,000,000 and the assessment rate is 7%, the assessed value would be $700,000.

How the Tax Bill Is Calculated

The assessed value is then multiplied by the total mill levy to determine the property tax owed. A mill levy is essentially the property tax rate, with one mill equaling 1/10th of one cent, or 0.001.

Multiple government bodies typically have the authority to levy property taxes, including school districts, water districts, the city and the county. Each entity determines how much revenue it needs to operate and sets its own mill rate. Those individual rates are then added together to create the total mill levy applied to your property.

To put some numbers to it: if a county needs $20 million for its fiscal year and the total assessed value of all commercial property in the county is $1 billion, the county’s mill rate would be 2%. Add in the rates from the school district, water district and other taxing bodies, and the combined mill levy might come to 5%. Applied to a $700,000 assessed value, that produces a property tax bill of $35,000.

Property Tax Notices and Contesting Assessments

Commercial property owners typically receive two notices: one for the property assessment and one for the actual tax bill. There is usually a 30- to 60-day window between the two, which gives owners the opportunity to contest the valuation before the bill is finalized.

Tax assessors sometimes overestimate the strength of the local market, miscalculate the square footage of an improvement or rely on comparable sales that do not accurately reflect a property’s condition. A successful challenge can meaningfully reduce the tax burden, and the appeal process is straightforward enough that it should be considered whenever the assessment seems out of line.

Tax Advantages of Owning Commercial Real Estate

With all these taxes in play, it is fair to ask why investors bother with commercial property at all. The answer, in large part, comes down to the tax advantages. If you are still weighing whether ownership is the right move for your business, our guide to buying vs. leasing office space covers the broader decision. But for owners, the tax benefits are a major part of the equation. Commercial real estate offers several significant advantages that can offset the tax burden and, in some cases, shelter income from other sources entirely.

Depreciation Deductions

Even though real estate generally appreciates over time, tax law allows investors to treat the physical structure as a wasting asset and deduct a portion of its value each year. The IRS permits commercial buildings to be depreciated over a 39-year period and residential rental properties over 27.5 years. This non-cash deduction can offset real cash income the property generates, reducing taxable income without requiring any additional out-of-pocket spending.

Investors looking to accelerate those deductions can work with industry professionals to conduct a cost segregation study, which identifies components of the property (electrical systems, flooring, cabinetry, landscaping and so on) that qualify for shorter depreciation schedules.

100% Bonus Depreciation (Permanent as of 2025)

The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, permanently restored 100% bonus depreciation for qualifying property acquired and placed in service after January 19, 2025. Before the OBBBA, bonus depreciation had been phasing down and was set to reach 40% in early 2025. Under the current rules, investors can immediately deduct the full cost of qualifying assets in the year they are placed in service, rather than spreading the deduction out over decades. Combined with a cost segregation study, this can produce substantial first-year deductions on newly acquired commercial properties.

Mortgage Interest Deductions

The interest paid on a commercial mortgage is deductible from federal income taxes. This can be especially impactful in the early years of a loan, when a larger share of each payment goes toward interest. In addition to mortgage interest, investors can also deduct property repairs, maintenance costs and certain property management expenses.

Pass-Through Deductions (Section 199A, Now Permanent)

The qualified business income (QBI) deduction allows eligible owners of pass-through entities, including sole proprietorships, partnerships, S corporations and most LLCs, to deduct up to 20% of qualified business income from their taxable income. This applies to rental property income across property types, including office, industrial, retail and multifamily investments.

Originally enacted as a temporary provision under the Tax Cuts and Jobs Act in 2017, the Section 199A deduction was made permanent by the OBBBA. The law also expanded the income thresholds at which the deduction begins to phase out and introduced a new minimum deduction of $400 for active business owners with at least $1,000 in qualifying income. As of the 2026 tax year, the full deduction is generally available to single filers with taxable income below approximately $203,000 and married couples filing jointly below approximately $406,000, with a wider phase-out range before the deduction is fully eliminated. These thresholds are indexed for inflation and will adjust in future years.

1031 Tax-Deferred Exchanges

Section 1031 of the Internal Revenue Code allows real estate investors to defer capital gains taxes (the tax owed on the profit from selling a property for more than its purchase price) when selling an investment property, provided the proceeds are reinvested into another qualifying property of equal or greater value through a properly structured exchange. The tax is not eliminated, but it is deferred, and investors can continue rolling gains forward through successive exchanges over a lifetime. When the investor passes away, heirs receive a stepped-up basis, which can effectively erase the deferred gains entirely.

The rules are strict, and missing a deadline can disqualify the exchange entirely, triggering immediate tax liability. Investors have 45 days from the sale to identify replacement properties and 180 days to close. A qualified intermediary must hold the proceeds throughout the process. Despite periodic proposals to limit or repeal 1031 exchanges, the OBBBA preserved them fully intact with no caps on deferral amounts.

Qualified Opportunity Zone Investments

The Qualified Opportunity Zone (QOZ) program was originally established under the Tax Cuts and Jobs Act of 2017 to encourage investment in economically distressed communities. The OBBBA made the program permanent and introduced several modifications that reshape how it works going forward.

Under the original program, investors could defer capital gains by placing them into a Qualified Opportunity Fund (QOF), with the deferred gains becoming taxable on December 31, 2026. That date still applies to existing investments. For new investments made after December 31, 2026, the structure shifts to a rolling five-year deferral period, with a standardized 10% basis step-up at the end of those five years. The earlier provision offering an additional 5% step-up at seven years has been eliminated.

The program’s signature benefit, the complete exclusion of new capital gains on investments held for at least 10 years, remains intact. The OBBBA also created a new category called Qualified Rural Opportunity Funds, which invest exclusively in rural QOZs and offer enhanced benefits: a 30% basis step-up after five years (compared to 10% for standard QOFs) and a reduced substantial improvement threshold of 50% of basis instead of 100%. Current QOZ designations will sunset at the end of 2026, and a new round of designations will take effect on January 1, 2027, with state governors proposing new zones and the Treasury certifying them on a recurring 10-year cycle.

These are powerful incentives, but they come with real complexity. QOZ investments are generally illiquid, tying up capital for years. The OBBBA introduced significantly heavier reporting requirements for both QOFs and the businesses they invest in, with penalties of up to $50,000 for noncompliance. Some current zones will lose their designation in the redesignation process. For all of these reasons, professional guidance is essential before committing capital to an opportunity zone fund.

Rental Loss Deductions

If a commercial property operates at a loss, that loss may be deductible depending on the investor’s income level and involvement. The IRS distinguishes between three general categories of taxpayers for these purposes. Investors earning $100,000 or less per year may be able to deduct some rental losses against other income. Those earning above $150,000 generally face limits on passive loss deductions. However, investors who qualify as designated real estate professionals under IRS rules (requiring at least 750 hours per year of material participation in real estate activities) face no cap on deductible real estate losses.

Stepped-Up Basis for Heirs

Commercial real estate can also provide significant tax advantages in estate planning. When a property owner dies, the heirs receive the property at its current fair market value rather than the original purchase price. If an investor originally purchased a property for $2 million and it is worth $5 million at the time of death, the heirs’ basis resets to $5 million. If they later sell for $6 million, they would owe capital gains tax on just $1 million.

Consult a Tax Professional

The tax landscape for commercial real estate has shifted significantly in recent years, with permanent bonus depreciation, a permanent pass-through deduction and a newly permanent opportunity zone program all working in investors’ favor. But these provisions come with complex rules, strict timelines and meaningful compliance requirements. Working with a qualified tax professional who understands commercial real estate is the best way to make sure you are capturing every available benefit while staying on the right side of the code.

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Frequently Asked Questions (FAQ)

Q: How are commercial property taxes different from residential property taxes?
A: The mechanics are similar, but commercial tax bills are typically much higher because the properties are worth more and generate income. Commercial owners also face additional tax categories beyond property tax, including federal and state income taxes on net rental income and, in some jurisdictions, a rental or sales tax on gross rent collected.

Q: Can I pass property taxes through to my tenants?
A: Yes, and most commercial landlords do. In a triple net (NNN) lease, the tenant pays property taxes, insurance and maintenance costs directly. In gross or modified gross leases, these costs are typically built into the rental rate. Either way, the tax burden can be structured so that tenants absorb some or all of it. For a closer look at how these lease structures affect what you actually pay, see our guide on how to calculate commercial rent.

Q: How often is a commercial property reassessed?
A: It depends on the county. Some jurisdictions reassess every year, while others operate on cycles of three to five years. When a property is sold or significantly improved, it may trigger an immediate reassessment regardless of the normal schedule.

Q: What is a 1031 exchange, and is it still available?
A: A 1031 exchange allows investors to defer capital gains taxes by reinvesting the proceeds from a property sale into another qualifying property. Yes, it is still fully available. The OBBBA preserved Section 1031 with no limits on deferral amounts. The key deadlines are 45 days to identify replacement properties and 180 days to close. Missing either deadline disqualifies the exchange and triggers immediate tax liability.

Q: What changed with bonus depreciation under the OBBBA?
A: The OBBBA permanently restored 100% bonus depreciation for qualifying property acquired and placed in service after January 19, 2025. Before the law passed, bonus depreciation had been phasing down and was headed to 40%. Investors can now immediately deduct the full cost of qualifying assets in the year they are placed in service.

Q: Are Opportunity Zones still a viable investment strategy?
A: Yes, and the program is now permanent. For existing investments made under the original 2017 law, deferred gains become taxable on December 31, 2026. For new investments made after that date, the program shifts to a rolling five-year deferral with a 10% basis step-up. Investments held for 10 or more years can still qualify for a full exclusion of new capital gains. Enhanced benefits are available for investments in rural Qualified Opportunity Zones. However, these investments are complex, generally illiquid, and carry strict compliance requirements. Professional guidance is essential.

Q: What is the Section 199A pass-through deduction?
A: It allows eligible owners of pass-through businesses (sole proprietorships, partnerships, S corporations, most LLCs) to deduct up to 20% of qualified business income from their taxable income. The OBBBA made this deduction permanent. Income thresholds are indexed for inflation; check with a tax professional for the current year’s limits.

Q: Should I contest my property tax assessment?
A: If you believe the assessed value does not accurately reflect your property’s market value, yes. Common grounds for appeal include errors in the recorded square footage, reliance on comparable sales that do not match your property’s condition or location, or an overestimation of rental income potential. A successful appeal can meaningfully reduce your annual tax bill, and the window to file is typically 30 to 60 days after receiving the assessment notice.

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