Bonus Depreciation

Understanding Bonus Depreciation with NNN Properties

Bonus depreciation is a powerful tax incentive that allows real estate investors to immediately deduct a significant portion—or even the entire cost—of eligible property improvements and equipment in the year of acquisition. When applied to triple net lease (NNN) properties, particularly in sectors such as gas stations, car washes, and auto repair facilities, bonus depreciation can provide substantial tax benefits and dramatically improve after-tax returns.

With the recent passage of new legislation restoring 100% bonus depreciation, real estate investors are once again able to leverage this tool to its fullest potential. The current law allows full expensing of qualifying property placed in service, making now an opportune time to consider how certain NNN investments can create meaningful tax savings.

What Is Bonus Depreciation?

Bonus depreciation is a tax provision that allows investors to immediately deduct the cost of qualifying business-use property, rather than depreciating it over its useful life. It’s especially impactful in the year a property is placed in service, enabling investors to offset income with a large, upfront deduction.

For real estate investors, bonus depreciation primarily applies to certain non-structural components of a property or to specific types of properties that qualify as short-life assets under the tax code. With proper structuring and a cost segregation study, an investor can allocate large portions of a property’s purchase price to assets with shorter recovery periods (such as 5, 7, or 15 years), making them eligible for immediate expensing through bonus depreciation.

Bonus Depreciation and NNN Properties

Although standard real estate structures (like walls, roofs, and foundations) are depreciated over 39 years and do not qualify for bonus depreciation, many NNN properties include features and improvements that do. In particular, components such as:

  • Parking lots
  • Signage
  • Exterior lighting
  • Specialized plumbing or electrical systems
  • Millwork and cabinetry
  • HVAC systems connected to equipment

These components can often be separated and categorized as 5-, 7-, or 15-year property, and therefore are eligible for 100% bonus depreciation.

This makes NNN properties especially attractive when paired with a cost segregation study, which breaks down the property’s components and accelerates depreciation on eligible parts. The result is a large, first-year tax deduction that can be used to shelter income from the property itself—or from other investments.

Why Automotive and Fuel NNN Properties Qualify in Full

Some types of NNN properties go even further. Certain automotive-related assets—including gas stations, car washes, and auto service centers—qualify as 15-year property in their entirety, making the entire structure (excluding land) eligible for 100% bonus depreciation under the current law.

1. Gas Stations

The IRS specifically classifies gas station buildings (and their related improvements) as 15-year property. This includes the convenience store portion, canopy, pumps, and underground fuel systems. Since the entire site (excluding land) qualifies, investors can often expense the full cost in year one.

2. Car Washes

Car washes—especially express, self-serve, or tunnel-style operations—are often categorized as special-use 15-year property. This includes the structure, specialized plumbing, electrical systems, conveyors, dryers, and related equipment. Investors acquiring a car wash NNN property can often write off the entire value (excluding land) through bonus depreciation.

3. Auto Repair and Service Centers

Freestanding quick lube shops, tire centers, and other auto service facilities are often classified as special-use 15-year real property as well. This classification allows investors to expense the building and related site improvements in full during the year of purchase, assuming the property is placed into service.

Because these automotive-focused NNN properties often come with long-term leases from national tenants like Valvoline, Jiffy Lube, or Firestone, they deliver not only passive income but also significant year-one tax deductions.

Practical Example of 100% Bonus Depreciation

Consider the following scenario:

An investor purchases a branded express car wash NNN property for $3.5 million, with a long-term lease in place. A cost segregation analysis determines that approximately $3 million of the purchase (excluding land) qualifies as 15-year property.

Because the property qualifies in full, and current tax law allows 100% bonus depreciation, the investor can deduct the entire $3 million in the year the property is placed in service.

If the investor has significant passive real estate income—or qualifies as a real estate professional and can apply losses against ordinary income—this deduction can:

  • Reduce taxable income substantially
  • Create a large tax refund (if overpaid)
  • Be carried forward to future tax years

This first-year deduction can dramatically increase after-tax cash flow, improving returns and freeing up capital for reinvestment into more assets.

The Role of Cost Segregation

To take full advantage of bonus depreciation, most investors will need to conduct a cost segregation study. This engineering-based analysis breaks a property into its individual components and assigns proper recovery periods for depreciation.

Without a cost segregation study, an investor might only claim straight-line depreciation over 39 years. With one, they can reclassify large portions into 15-, 7-, or 5-year property and immediately expense them using bonus depreciation.

The study cost is usually a small fraction of the tax savings and is often considered a necessary step in maximizing depreciation benefits.

Combining Bonus Depreciation and NNN for Wealth Building

Many investors are combining the benefits of triple net leasing with bonus depreciation to create high-performing, low-maintenance investment portfolios. Here’s why this strategy is so effective:

  • NNN leases provide passive income with no landlord responsibilities
  • Tenants cover taxes, insurance, and maintenance
  • Bonus depreciation creates massive first-year write-offs
  • Strategic reinvestment of tax savings accelerates portfolio growth
  • High-credit tenants offer long-term stability and reduced risk

For investors in high tax brackets or those with large capital gains, acquiring qualifying NNN properties can reduce taxable income substantially while building reliable, cash-flowing real estate assets.

Risks and Considerations

While bonus depreciation is highly beneficial, it’s not without risk or complexity. Consider the following:

  • Depreciation Recapture: If the property is sold, the IRS may recapture some of the deductions at a higher tax rate.
  • Real Estate Professional Status: Passive losses from depreciation may be limited unless the investor qualifies as a real estate professional.
  • Audit Risk: Misclassification of assets without a proper cost segregation study could trigger IRS scrutiny.
  • Legislative Risk: Although 100% bonus depreciation is currently law, tax policy is always subject to change.

Working with an experienced CPA and legal team is essential to ensure proper execution and long-term compliance.

Conclusion

With the reinstatement of 100% bonus depreciation, investors have a rare opportunity to combine long-term, low-maintenance income with substantial first-year tax deductions—particularly through targeted investments in NNN-leased gas stations, car washes, and auto repair properties.

By conducting a cost segregation study and strategically acquiring special-use assets, real estate investors can significantly lower their tax burdens, reinvest more capital, and build a high-yield portfolio designed for both income and appreciation. When used responsibly and with professional guidance, bonus depreciation remains one of the most powerful tools available for wealth creation in real estate.

Disclaimer:
This document is for informational purposes only and does not constitute legal, tax, or investment advice. Investors should consult with a qualified attorney, tax advisor, or financial professional to determine the applicability of bonus depreciation or related tax strategies to their specific situation. Laws and IRS guidelines may change, and individual circumstances vary. Always seek professional guidance before proceeding with a tax planning strategy.