Maximizing Bonus Depreciation

Since 2017, Bonus Depreciation has been a powerful tool for commercial real estate (CRE) investors looking to offset significant capital gains or passive income. However, this benefit is set to gradually phase out, creating a limited window of opportunity. For investors focused on tax deferral strategies, Bonus Depreciation offers unique advantages over traditional methods like 1031 exchanges or opportunity zones. With the impending sunset of this tax break, now is the time to act—especially for those interested in investing in gas stations and convenience stores (C-Stores).

What is Bonus Depreciation?

Bonus Depreciation allows investors to accelerate tax deductions by writing off a substantial portion of a property’s cost in the year it is placed into service, as opposed to the traditional 39-year depreciation schedule used for most CRE. Initially raised to 100% under the Tax Cuts and Jobs Act of 2017, Bonus Depreciation applies to qualifying assets with a recovery period of 20 years or less. This allowed investors to immediately write off the full cost of improvements and assets placed in service after September 27, 2017.

However, the rules are now phasing out. Starting in 2023, the Bonus Depreciation rate began decreasing by 20% each year and will drop from 60% this year to 40% in 2025, before being phased out completely by 2027—unless Congress extends the provision.

Why C-Stores Are the Ideal Property for Bonus Depreciation

Convenience stores with gas stations are particularly attractive investments under the Bonus Depreciation rules because these properties often meet the qualifications for accelerated depreciation. Investors who own properties leased to high-credit tenants like 7-Eleven, QuikTrip, or Circle K can leverage Bonus Depreciation to offset both ordinary income and capital gains, potentially creating significant tax savings.

For example, if an investor purchases a $5 million C-Store, excluding the land value, a large portion of that cost can be deducted upfront, resulting in potentially hundreds of thousands of dollars in tax savings. These properties, when leased to creditworthy tenants, provide not only tax advantages but also long-term income stability.

Why Investors Are Focusing on C-Stores Now

The demand for C-Stores as investment properties has surged, especially those with long-term net leases to tenants like 7-Eleven, QuikTrip, and Murphy Oil. These properties have proven to be recession-resistant, outperforming other sectors during the pandemic due to their essential nature. With corporate-backed leases that guarantee income streams, they offer both stability and security.

Those are compelling reasons why newly opened, corporate-leased C-Stores are in high demand, often selling out quickly. The inventory of new 15+ year NNN leased 7-Eleven properties, that qualified for Bonus Depreciation, were entirely sold out prior to year-end 2023. The scarcity of available inventory, combined with the looming phase-out of Bonus Depreciation, makes these properties even more attractive to investors looking for a safe, tax-advantaged opportunity.

How Bonus Depreciation Works

Bonus Depreciation offers several advantages when compared to the standard depreciation timeline of 39 years for CRE. By accelerating the depreciation of qualifying assets, investors can write off the entire cost (minus land) much faster. This creates significant tax deferral opportunities, allowing investors to reinvest those tax savings into new ventures.

For C-Stores with a retail motor fuel component, the entire purchase price of the property (excluding land) may be eligible for Bonus Depreciation if specific conditions are met. This includes both the building and any improvements made to the property.

Key Tests for Qualifying C-Stores

Not all C-Stores qualify for Bonus Depreciation. The property must meet the definition of a “retail motor fuels outlet,” and must pass one of the following tests:

1. At least 50% of the C-Store’s gross revenue comes from petroleum sales.
2. 50% or more of the floor space is dedicated to petroleum marketing activities (including restrooms, counters, and service areas).
3. The C-Store occupies 1,400 square feet or less, regardless of revenue or floor space.

Properties that meet one of these tests are eligible to be depreciated over a shorter 15-year period using a 150% declining balance method, making them perfect candidates for Bonus Depreciation. However, it’s important to note that ground leases do not qualify, as land itself is not depreciable.

The Future of Bonus Depreciation: What to Expect

The future of Bonus Depreciation is uncertain. In early 2024, the House of Representatives passed legislation to extend the benefit, but it remains stalled in Congress due to political gridlock ahead of the recently completed presidential election. As it stands, the law is set to phase out completely by 2027.

In 2024, the Bonus Depreciation rate is fixed at 60%, offering a shrinking window of opportunity for investors to benefit from this tax strategy. By 2025, the rate will drop to 40%, further reducing the advantages. Given the uncertainty of an extension, investors should act quickly to maximize the remaining benefits.

Real Estate Investment Benefits

In addition to the tax savings offered by Bonus Depreciation, investing in C-Stores provides other key benefits. These properties are often located in high-traffic areas with excellent visibility and vehicle access—prime real estate for retailers. C-Stores tend to be meticulously vetted by tenants, ensuring that each location is positioned for strong sales performance.

The stability of long-term leases, combined with no maintenance responsibilities typical of net lease agreements, further enhances the appeal of these investments. For investors seeking reliable income streams with reduced management burden, C-Stores leased to creditworthy tenants represent one of the best opportunities in the NNN market.

Act Now to Capitalize on Bonus Depreciation

There is still time to take advantage of Bonus Depreciation, with the rate set at 60% for 2024. Investors who act now can lock in significant tax savings before the benefit continues to phase out. Whether you’re new to commercial real estate or an experienced investor, Bonus Depreciation offers a smart tax planning strategy to offset taxable income and boost returns.

Secure Net Lease has closed escrow on nearly 500 C-Store properties, totaling over $2 billion in transactions. The firm’s dedicated research team tracks every convenience-store property that comes to market in real time, allowing it to offer unmatched insights and access to prime investment opportunities. Contact Secure Net Lease today to learn how to capitalize on this powerful tax strategy before it’s too late.