May 25, 2022

The Single-Tenant Bonus Depreciation Chase Is On

written by Zach Wright, published in CREJ

Demand for single-tenant net lease properties has been immense throughout the past several years. Much of the recent demand has come from typical motivated investors – 1031 exchange buyers, funds and real estate investment trusts with ample cash needing deployment. 

However, a highly motivated investor type has recently emerged wanting to purchase STNL properties that qualify for 100% bonus depreciation or accelerated depreciation. Most notably, investors have flocked to fee-simple single-tenant gas station or convenience store properties due to their 100% bonus depreciation. 

The Tax Cuts and Jobs Act of 2017 extended the availability of bonus depreciation to qualified property (purchases) placed into service prior to Jan. 1, 2027, and temporarily increased the allowance to 100% of the value of assets acquired and placed in service prior to Jan. 1, 2023. This allows an investor to immediately write off all improvements in year one, which can be as high as 100% of the acquisition cost (net of land). For example, if an investor acquires a qualifying gas station property in 2022 for $3 million, the investor could take up to $2.4 million ($600,000 allocated to land) as a year one depreciable deduction, equating to approximately $840,000 of post-tax value (based on a 35% tax rate). Additionally, many states also recognize bonus deprecation, and there could be further savings at the state level. This provides investors with substantial cash flow compared to the typical 39-year straight-line depreciation utilized by most commercial properties. 

For a fee-simple property to qualify for 100% bonus depreciation, it must meet one of the following three rules: 

1. 50% or more of the c-store’s gross revenues are derived from petroleum sales.

2. 50% or more of the floor space in the c-store is devoted to the petroleum marketing activity.

3. The c-store consists of 1,400 square feet or less (regardless of qualification under either 50% test).

This 100% bonus depreciation is scheduled to gradually phase out after 2022. The bonus depreciation will be reduced by increments of 20% per year until it’s completely phased out in 2027. Largely because of their depreciation benefits, STNL gas stations are trading for historically low cap rates. The investor demand and competition for these properties is robust. The expectation for the second half of 2022 is a flurry of activity and continued strong pricing due to this being the final year of 100% bonus depreciation. Many savvy gas station owners will consider selling their properties now due to the current market conditions. 

Gas station properties are not the only STNL property type offering enticing depreciation benefits. Car washes, collision repair centers and lube center properties all offer attractive depreciation benefits whereby investors can depreciate 25% to 100% of the acquisition in year one. 

Car wash properties can be depreciated similarly to gas stations with special rules, whereby the value of the improvements can be fully depreciated in year one. However, collision repair centers and lube center properties function slightly differently. To maximize the depreciable benefit for these property types, an investor will need to conduct a cost segregation study by a qualified professional to identify 1245 (personal) property, land improvements and other short-lived property that has been misclassified as building property if depreciating over straight-line depreciation. Utilizing MACRS (as opposed to straight-line), an investor can apply 100% bonus depreciation to a significant portion of the property. 

Kim Lochridge with Engineered Tax Services Inc. assists investors to maximize federal, state and local tax benefits with a focus on depreciable properties. 

“The demand for car washes and gas stations has risen significantly since 2017,” said Lochridge. “Cost segregation is a powerful tool on any investment property, but exponentially better for car washes or gas stations due to the special rules. It’s a good idea to have a cost segregation study on these properties to establish that the facts and circumstances have been met, and the 1245 and 1250 property has been determined, especially when taking a deduction in the millions all in one year.” 

It seems most investors are unaware of the many advantageous tax benefits various STNL properties can offer. In fact, most investors are shocked upon learning about them and typically call their accountant immediately thereafter. With 100% bonus depreciation beginning to sunset after this year, now is the time to consider adding a gas station, car wash, collision repair center or lube center to your portfolio. 


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