Very few, if any, other investments offer the tax benefits and opportunities that commercial real estate investing offers, especially triple net (NNN) lease properties. The immediate and often significant tax advantages that help build wealth set this asset class apart from stock market investments, the bond market, mutual funds, ETFs, art investments, NFTs, and many retirement plans.
With the passage of the One Big Beautiful Bill Act in July 2025, the tax landscape for NNN investors has become even more favorable. The permanent restoration of 100% bonus depreciation and the extension of critical deductions create unprecedented opportunities for wealth building through commercial real estate.
So, what are the most common NNN lease investing tax benefits?
- Depreciation: Straight Line, Cost Segregation, Bonus Depreciation
- Pass-through Deduction: If you own properties through an LLC or business
- Long-term Capital Gains Tax: Typically less than income tax levies
- 1031 Exchange: Defer federal capital gains tax when selling an investment property
Please note, Westwood Net Lease Advisors is not providing legally binding tax advice. This article is informational only. Please consult with your CPA or tax advisor for verification of your individual tax situation.
Tax Benefit #1: Depreciation Strategies for Maximum NNN Property Deductions
Straight Line Depreciation
Straight line depreciation, or “straight line basis,” is the easiest way to estimate the taxable loss of your NNN property over time. Calculate straight line depreciation by dividing the difference between the property’s cost and its expected salvage value (ESV) by the number of useful years.
For example:
- Take the cost of the property minus the land value to arrive at your total depreciation cost: $1,000,000 – $300,000 (land value) = $700,000 depreciation cost.
- Then determine the useful life of property: 39 years for commercial property.
- Divide the depreciation cost by those years for your potential annual depreciation amount: $700,000/39 years = $17,948 annual fixed depreciation amount.
You can deduct the annual fixed depreciation amount on your taxes each year until the property reaches the end of its useful life, i.e. the depreciation is complete, or you sell the property. All property types except ground lease properties can qualify for straightforward depreciation.
Cost Segregation Depreciation
Cost segregation depreciation (CSD) allows for nonstructural “leasehold” improvements, such as indoor and outdoor lighting, heating and cooling systems, and parking lot and landscaping, to be depreciated over a shorter amount of time: five, seven, or 15 years versus 39 years.
This substantially shorter depreciable tax life helps you preserve capital, realize immediate cash flow, and achieve significant tax relief on new and existing buildings. These benefits are also gained through asset reclassification and write-offs when the asset is sold. In summary, CSD allows you to:
- Adjust deduction timing to maximize tax savings.
- Swiftly depreciate expenses.
- Reduce/defer current tax liability.
- Increase cash flow for other investment opportunities or operating expenses.
- Take 100% of the adjustment in one year with bonus depreciation.
- Reclaim deductions dating back to 1987 without having to amend tax returns.
- Create an audit/paperwork trail that satisfies the IRS’s audit techniques guide (ATG).
The only way to determine if your newly purchased or existing NNN property qualifies for the maximum CSD benefit is to have engineering, architecture, construction, or tax accounting specialists perform a cost segregation study (CSS).
Chris Schellin, President of Westwood Net Lease Advisors, explains, “Cost segregation depreciation, which can be substantial and immediate, especially with bonus depreciation, offers one of the biggest tax benefits available to the triple net lease investor.”
100% Bonus Depreciation: Now Permanent Under the One Big Beautiful Bill Act
The Internal Revenue Service (IRS) bonus depreciation tax code allows business taxpayers to deduct additional depreciation for the cost of qualifying new or used business property (excluding real property but including leasehold improvements) in the year it was placed into service. A leasehold improvement or a “qualified improvement to the property” is any improvement made to an interior portion of a nonresidential building already placed in service. A CSS can identify the potential depreciation amount.
In a game-changing development for commercial real estate investors, the One Big Beautiful Bill Act, signed into law on July 4, 2025, permanently restored 100% bonus depreciation for qualified property acquired after January 19, 2025. This reverses the scheduled phaseout that would have reduced the benefit to 40% in 2025, 20% in 2026, and zero by 2027.
What this means for NNN investors: When you purchase a triple net lease property and conduct a cost segregation study, you can now immediately deduct 100% of the cost of qualifying leasehold improvements and personal property in the year the property is placed in service. This permanent tax benefit creates substantial first-year tax savings and improved cash flow, making 2025 an exceptional time to invest in NNN properties.
The Act also increased Section 179 expensing limits from approximately $1.25 million to $2.5 million, with the phaseout threshold raised to $4 million, providing additional flexibility for investors to immediately expense qualifying property.
Tax Benefit #2: The Pass-Through Deduction for LLC and Business Entity Owners
The Tax Cuts and Jobs Act created a tax deduction called the Qualified Business Income (QBI) deduction (Section 199A). To qualify for the QBI tax code and claim as much as a 20% deduction on your income, your business must be a pass-through entity, such as an LLC or sole proprietorship, and meet certain guidelines as outlined by the IRS.
This powerful federal tax deduction, which was originally scheduled to expire on December 31, 2025, has now been made permanent under the One Big Beautiful Bill Act. This permanency provides critical long-term tax planning certainty for NNN investors who structure their investments through LLCs or other pass-through entities.
For investors holding properties through an LLC structure, this means you can continue to deduct up to 20% of your qualified business income indefinitely, creating substantial annual tax savings that compound over the life of your investment.
Tax Benefit #3: Long-Term Capital Gains Tax Rates for Real Estate Sales
When you sell commercial real estate, profits from the sale are usually taxed as capital gains rather than “income.” Capital gains taxes are levied by the government at a special tax rate based on various factors: short-term or long-term gain, annual income bracket, and filing status. Typically, long-term capital gains are taxed by the IRS at 0, 15, or 20%, while short-term gains on an asset held for less than a year are typically taxed on a taxpayer’s ordinary tax bracket, from 10 to 37%.
In addition to federal capital gains tax, there are also state capital gains taxes and/or state income taxes to consider. Many states calculate capital gains taxes and income taxes differently, and some do not impose them at all, so be sure to understand the regulations of the state in which you file taxes (not necessarily the state where your CRE investment is) to minimize your capital gains tax bill.
And let’s not forget about the 1031 exchange, which allows complete deferral of the federal capital gains tax, potentially indefinitely.
Tax Benefit #4: 1031 Exchange Tax Deferral Strategy
When you decide to sell your NNN lease property, if the sale price exceeds the tax basis or adjusted cost basis, the difference is “recaptured” by reporting it as income. There is also a capital gains tax levied by the IRS and possibly the state in which you file taxes.
However, when you use a 1031 exchange to trade into a different investment property, not only can you defer 100% of the federal capital gains tax, possibly indefinitely, but you may also defer the depreciation recapture tax, which can provide an additional savings of 25%, freeing up a significant amount of capital to reinvest.
Depending on your investment strategy, you could choose to exchange investment properties indefinitely as there is no limit to how many times you can use the tax code in a lifetime. The 1031 exchange is a smart way to build wealth by acquiring increasingly profitable commercial real estate while avoiding capital gains taxes.
With favorable market conditions in 2025, including attractive cap rates and stabilizing interest rates, 1031 exchange investors have exceptional opportunities to upgrade their portfolios into higher-quality NNN properties.
Strategic Tax Planning for NNN Investors Going into 2026
When it comes to NNN lease investing, a tax strategy is key. Whether you decide to form an Investment LLC, perform a CSS for cost segregation depreciation, or trade an underperforming property for a higher-value property using a 1031 exchange, when utilized correctly, the IRS’s tax codes can help you build wealth and keep your money working for you.
The permanent restoration of 100% bonus depreciation and the QBI deduction under the One Big Beautiful Bill Act represents a historic opportunity for commercial real estate investors. Combined with current market conditions that favor prepared buyers, 2025 presents an exceptional window for building wealth through tax-advantaged NNN investments.
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When you work with a Westwood Net Lease Advisor to purchase your next triple net property or use a 1031 exchange, we start the process by getting to know you and performing a risk tolerance assessment. This includes tax education and an exit strategy, so you know where you’re going and what you’ll get out of it before you invest your hard-earned money. Questions? Contact us today for a no-obligation conversation about triple net lease investing. Our buyer services are free. 314-997-5227
Please note that this article is not legal tax advice. It is purely informational about the different tax options. Consult your CPA or go to the IRS’s website for more.
