The term property tax includes several potential levies—taxes that homeowners pay on their primary residence, taxes that consumers pay on the value of their vehicles like cars, boats, and airplanes, and commercial taxes that investors pay on their holdings. In each case, the amount of the tax levied and the collection is determined locally, usually at the city or county level. Some states have high residential property taxes, while others do not. Depending on the locality, commercial property assessments may be higher or lower than residential taxes.
Who has to pay?
In any case, the owner is responsible for paying the taxes. In most circumstances, residential tenants don't pay property taxes on a rental home. Of course, the owner may include the cost of property taxes in their calculation of overall expenses and use that to determine how much to charge for rent. But typically, the property owner pays the property taxes and is always entitled to the deduction.
Commercial leases determine who pays.
However, the answer for a business property depends on the type of lease employed. If tenants have a gross lease, they pay rent and possibly part of the utility costs. The landlord pays the ownership costs, including taxes, insurance, maintenance, and taxes. The owner would certainly want to estimate those costs when determining the rent rate, but the tenant isn't responsible for making up any shortfall during the lease term. Gross leases are frequent choices for multi-tenant office buildings and industrial spaces.
Net leases shift some costs from the owner directly to the tenant or tenants. The net lease category includes single, double, triple, and absolute, sometimes called a zero net lease. Each subcategory is differentiated by the expenses assigned to the tenant instead of the owner. For example, with a single net lease, the tenant pays their rent and utilities, plus their share of the property taxes, depending on how much of the building they occupy.
Suppose that the building has ten individual suites which are roughly the same size. That makes it simple to divide the expenses among the tenants. If the utilities are sub-metered, each tenant pays their bill. Otherwise, they could pay a portion based on the square footage they occupy. They would also pay a ratio of the property taxes based on occupancy. If one tenant grows and takes over more space, the landlord can assign them a more significant share of the cost.
Double and triple net leases function similarly.
In a double net lease, the tenant pays rent, utilities, a share of the property taxes, and a percentage of the property insurance. Similarly, with a triple net lease, the tenant shoulders those expenses plus repairs and maintenance. Typically, the landlord only pays for major structural issues like the roof, HVAC, or parking lot repairs. NNN (triple net) leases are preferred by some tenants who don't want to own real estate but prefer to control their buildings.
The same is true for those who engage in zero net agreements, sometimes called absolute net leases. In those arrangements, there is usually just one tenant, and it may be a sale with a leaseback. Some organizations pursue that when their strategy changes or they need to raise capital or reduce debt.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.
Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.
Programs that depend on tenants for their revenue may suffer adverse consequences because of any financial difficulties, bankruptcy or insolvency of their tenants.