Net Lease Gas Stations Offer Bonus Depreciation Investment Opportunity

Net Lease Gas Stations Offer Bonus Depreciation Investment Opportunity

Gas stations are unique and attractive assets for investors looking to top off their portfolios. Triple net lease gas stations offer passive cash flow, often with the stability of reputable tenants and corporate guarantees, but there’s one more reason buyers are excited: bonus depreciation deductions.

What’s so exciting about bonus depreciation?

“In many cases, gas stations are eligible for the 100% Bonus Depreciation deduction in year one of ownership. Depreciation-motivated purchasers of gas stations generally seek to offset significant capital gains or other passive income on their tax bills with the generous Bonus Depreciation deduction that gas station ownership affords them,” said B+E broker, Spencer Henderson. “I’m not qualified to speak on the more specific nuances of the TCJA, so investors should always consult a tax professional before making their investment decisions.”

Gas stations in particular have seen a lot of interest. B+E has seen the market close on +/- 282 gas station sales year-to-date, with many buyers motivated to take advantage of the 100 percent bonus depreciation deduction.

Under the Tax Cut and Jobs Act passed in 2017, up to 100 percent bonus depreciation will be allowed through 2022. This rate will phase out by 20 percent each year until 2027, so the rate will drop to a maximum of 80 percent in 2023. 

You’re probably wondering exactly what qualifies a gas station to be eligible for the 100% bonus depreciation. The tax code doesn’t provide us with a definition for gas stations, or as the IRS refers to them ‘retail motor fuel outlets.’ However, in the late 90s the IRS released Coordinated Issue Papers (“CIP”) for Petroleum and Retail Industries Convenience Stores, which does provide a detailed definition and qualifying criteria. 

As per the CIP paper, a C-store at the gas station will qualify as a ‘retail motor fuel outlet’ if they met any of the three following criteria:

1. 50% or more of its gross revenues generated from petroleum sales
2. 50% or more of its floor space devoted to petroleum marketing sales
3. The C-store building is 1400 square feet or less

“If the C-store passes any of the above tests, the entire depreciable basis (net of land) is eligible for a 15-year recovery period, and 100% bonus depreciation if acquired and placed in service after September 27, 2017,” said Kim Lochridge, Executive Vice President at Engineered Tax Services. “However, if they don’t meet any of the three criteria, the depreciation period for a C-Store building is 39-years. An experienced tax attorney or cost segregation can help you determine if the property or properties you’re looking at will be eligible*.”