Commercial Property Tax Implications in Colorado: What Investors Need to Know

One major factor influencing how profitable investments in commercial property are is taxes. Property investors in Centennial State manage better financially if they understand commercial property tax implications in Colorado. Knowing the specifics of property taxes, such as capital gains, depreciation, and more, is crucial.

If you’re wondering what is a tax implication and if there’s a way investors like yourself can also benefit from taxes, we’ll go into details about commercial property taxes. So, let’s get started.

What Is a Tax Implication?

The term “tax implications” describes how taxes affect an investment. Taxes for investing in real estate property can include capital gains tax, rental income tax, and other potential levies. Before deciding to invest in commercial real estate, it’s essential to understand commercial property tax implications in Colorado.

Here are common commercial property taxes that could affect property owners or investors.

  • Property taxes — A levy imposed on both mobile personal property and immovable property, such as land and buildings.
  • Federal taxes — A levy imposed on income, products, and services by the federal government.
  • State taxes — A levy imposed on income, products, and services by state governments.
  • Local taxes — A levy imposed by local governments on goods, services, and revenue that falls under their authority.

Commercial Property Tax Implications in Colorado

Tax implications in commercial property investments can vary based on several factors, including the property type, ownership structure, location, holding period, and applicable tax laws. Understanding these tax implications is crucial for commercial property investors as it can significantly impact the overall return on investment. 

Here are some common tax considerations for commercial property investors:

  • Rental Income — Rental income from commercial properties is generally taxable. It’s important to report this income on your tax return. Deductions for expenses related to the property, such as maintenance, repairs, property management fees, and mortgage interest, can often be claimed to offset the taxable rental income.
  • Depreciation — Commercial property owners can claim depreciation as a non-cash expense to offset taxable income. Depreciation allows you to deduct a portion of the property’s value over its useful life as allowed by tax laws.
  • Capital Gains Tax — When a commercial property is sold for a profit, the difference between the sale price and the property’s adjusted basis is considered a capital gain. Capital gains tax is typically applicable on the profit made from the sale. Strategies like a 1031 exchange in the U.S. or rollover relief in other jurisdictions can help defer capital gains tax when reinvesting in similar investment properties.
  • Pass-through Entities — Many commercial property investments are held through pass-through entities like partnerships, LLCs (Limited Liability Companies), or S corporations. In these cases, profits and losses “pass-through” to the owners’ personal tax returns, where they are taxed at individual tax rates.
  • Tax Credits and Incentives — Some jurisdictions offer tax credits or incentives for certain types of commercial property investments, such as historic preservation, renewable energy installations, or low-income housing projects.

Seeking advice from tax professionals or accountants familiar with real estate taxation can help investors navigate the complex tax landscape and optimize their tax strategies while complying with applicable laws.

How Commercial Property Tax Implications in Colorado Affect Investors

To maximize the financial advantages, each of these taxes has a different influence on the bottom line of the commercial real estate investor and requires careful tax planning. Investing in commercial property can have an impact on how profitable your businesses are.

Here are some key points regarding commercial property taxation in Colorado and how it impacts investors:

  • Property Valuation — Colorado uses a system known as the Gallagher Amendment, which aims to maintain a specific ratio between residential and commercial property tax revenues. The valuation of commercial properties is determined by county assessors every two years based on market value.
  • Assessment Rate — Colorado applies different assessment rates for residential and commercial properties. Residential properties have a fixed assessment rate of 7.15%, while commercial properties have an assessment rate of 29%. This higher assessment rate for commercial properties means that a larger portion of their market value is subject to taxation.
  • Taxation and Mill Levy — Once the assessed value is determined, property taxes are calculated based on the mill levy set by various taxing entities (such as school districts, municipalities, and counties) and applied to the assessed value of the property. This can vary widely depending on the location of the property.
  • Property Tax Exemptions — Colorado offers some property tax exemptions that may benefit commercial property investors. For instance, certain business personal property and equipment used for specific purposes may be eligible for exemptions.
  • Impact of Proposition 110 (if applicable) — Proposition 110, also known as Let’s Go Colorado, was a ballot initiative passed in 2018 that increased the state sales tax to fund transportation projects. The additional revenue generated from this sales tax increase was allocated to various transportation projects across the state.
FAQs

How are commercial properties assessed for tax purposes in Colorado?

Colorado assesses commercial properties every two years based on their market value. The assessment rate for commercial properties is 29%, meaning this percentage of the property’s market value is subject to taxation. County assessors determine the property’s value, which is then used to calculate property taxes based on the mill levy set by various taxing entities.

Are there any exemptions available for commercial property owners in Colorado?

Yes, Colorado offers certain exemptions that may apply to commercial properties. For instance, there are exemptions available for business personal property, which includes equipment, machinery, and furniture used for specific business purposes. 

Can commercial property owners appeal their property tax assessments in Colorado?

Yes, property owners have the right to appeal their property assessments if they believe they are inaccurate or unfair. The appeal process typically involves filing an appeal with the county assessor’s office or the Board of Assessment Appeals within a specified timeframe. 

How does Proposition 110 impact commercial property taxation in Colorado?

Proposition 110, also known as Let’s Go Colorado, was a ballot initiative passed in 2018 to increase the state sales tax to fund transportation projects. The additional revenue generated from this sales tax increase was allocated to various transportation projects across the state. While not directly impacting property taxes, understanding how such initiatives affect the state’s fiscal landscape can be important for overall tax considerations.

Conclusion

Anyone hoping to participate in this profitable real estate industry must understand and manage the taxes on commercial property. By being well-informed about commercial property tax implications in Colorado, you may reduce your tax payments and optimize your investment returns. Whether you are looking to invest or buy properties, our local and experienced real estate broker can help you find the right investment opportunities. Contact us today.