Bottom line: A qualifying 1031 exchange and 100% bonus depreciation can work together, but they address different parts of a transaction. Section 1031 may defer recognition of eligible gain when investment real estate is exchanged. Bonus depreciation may accelerate deductions for qualifying shorter-life components of the replacement property. Neither rule automatically applies to the full purchase price, and neither replaces careful basis, ownership and placed-in-service analysis.
For the broader depreciation framework, read Stonecliff’s commercial real estate bonus depreciation guide. Investors planning an exchange can also review our 1031 exchange advisory overview.
What changed for 100% bonus depreciation?
Public Law 119-21 amended Internal Revenue Code Section 168(k) to provide a 100% additional first-year depreciation deduction for qualified property acquired after January 19, 2025, subject to the statute’s acquisition, use and placed-in-service rules. The change replaced the scheduled phase-down for qualifying property. The law did not make land or an entire commercial building immediately deductible.
According to IRS Publication 946, nonresidential real property is generally depreciated over 39 years. Bonus depreciation generally concerns eligible property with a recovery period of 20 years or less, certain qualified improvement property and other specifically qualifying assets. A cost segregation study can help identify shorter-life components, but the study does not determine whether every component satisfies all tax requirements.
What may qualify in an NNN property?
The answer depends on the actual assets acquired, who owns them and how they are used. Potential shorter-life categories can include certain land improvements, site lighting, landscaping, removable finishes, specialized electrical distribution and qualifying personal property. The building structure and land generally do not qualify for bonus depreciation.
Triple-net lease terminology does not decide tax ownership. A lease may assign maintenance or replacement duties to the tenant while the landlord owns the underlying asset—or the tenant may own trade fixtures that were never conveyed to the buyer. Investors should reconcile the purchase agreement, lease exhibits, closing allocation and physical property records before relying on a preliminary estimate.
How a 1031 exchange changes the basis discussion
A properly structured like-kind exchange can postpone recognition of eligible gain on real property held for business or investment. It is generally a deferral, not an exclusion. The replacement property’s basis often reflects carryover basis from the relinquished property, adjusted for additional money, recognized gain and other elements of the transaction.
This matters because the replacement property’s purchase price is not automatically the amount available for new depreciation deductions. The investor and tax team must determine the replacement basis, allocate nondepreciable land, identify eligible depreciable components and account for prior depreciation and exchange adjustments.
The IRS basis guidance in Publication 551 explains that basis in property received through a like-kind exchange is generally connected to the basis of the property transferred, with adjustments for money and other property exchanged.
A simplified NNN replacement-property example
Assume an investor sells a net lease property through a qualifying exchange and acquires a $4 million replacement property. The investor’s tax team determines that the replacement basis is different from the $4 million contract price because part of the basis carries over from the relinquished property and part reflects additional investment. Land is then separated from depreciable basis.
A site-specific cost segregation study identifies some landlord-owned components as five-, seven- or 15-year property. Only the qualifying basis assigned to eligible components—not the land, not the tenant’s property and not automatically the entire building—may be considered for bonus depreciation. Passive-activity, at-risk, business-interest, state-law and other limitations may affect when or whether the resulting deduction can be used.
This example is intentionally incomplete: the correct calculation depends on the exchange statement, debt, cash, boot, closing costs, asset ownership and the investor’s individual tax position.
1031 exchange deadlines still control
Bonus depreciation does not cure a failed exchange. In a deferred exchange, replacement property generally must be identified within 45 days and received by the earlier of 180 days after transfer or the applicable tax-return deadline, including extensions. Investors also should avoid taking actual or constructive receipt of exchange proceeds and should involve a qualified intermediary before the relinquished-property closing.
The IRS provides a concise overview in its like-kind exchange real estate guidance and reporting details in the Instructions for Form 8824.
Real property and personal property are treated differently
Section 1031 now generally applies to qualifying real property, not equipment or other personal property. Cost segregation may classify components as personal property for depreciation purposes, so the transaction team should coordinate purchase-price allocations and exchange reporting. Inconsistent allocations among the purchase agreement, lender records, exchange documents and cost segregation report can create avoidable problems.
That does not mean cost segregation and a 1031 exchange are incompatible. It means the qualified intermediary, CPA, attorney and cost segregation provider should work from the same transaction facts.
Property types with meaningful shorter-life components
Some net lease assets may contain a larger proportion of specialized improvements or equipment than a basic building shell. Examples can include convenience stores, car washes, quick-service restaurants, automotive service properties and certain medical facilities. But property type alone never guarantees a deduction.
Before underwriting a tax benefit, verify whether the landlord actually owns the equipment, whether the asset was conveyed at closing, whether it is ready and available for use, and how it is classified under federal and state rules. Browse current Stonecliff listings to see how net lease property characteristics differ by tenant and use.
Plan for recapture and the eventual exit
Accelerated deductions can reduce adjusted basis. A later taxable disposition may produce depreciation recapture, unrecaptured Section 1250 gain or other taxable gain depending on the assets and transaction. Another exchange may continue deferral for qualifying real property, but it does not make prior calculations disappear.
A useful analysis compares the present value of current deductions with projected holding period, expected exit value, future tax exposure, study cost and the investor’s ability to use losses. Read Stonecliff’s commercial property recapture guide for the next layer of planning.
Questions to answer before closing
- Was the property acquired under a binding contract entered into after the applicable statutory date?
- When will the property and each significant component be ready and available for its intended use?
- Which assets are owned by the landlord, and which belong to the tenant?
- How will land, building, land improvements and personal property be allocated?
- What is the replacement property’s calculated tax basis after the exchange?
- How could passive-loss, at-risk, interest-limitation and state rules change the usable benefit?
- What recapture or gain could arise in a later taxable sale?
Frequently asked questions
Can I take bonus depreciation on the entire replacement property?
Generally, no. Land is nondepreciable, and the commercial building structure is typically longer-life property. Bonus depreciation applies only to qualifying basis assigned to eligible components after the required analysis.
Does a 1031 exchange reset depreciation basis to the purchase price?
Not automatically. Replacement basis generally incorporates carryover basis and transaction adjustments. Additional investment may create additional basis, but the exchange calculation must be completed before estimating depreciation.
Can used property qualify for 100% bonus depreciation?
Certain used property can qualify when the statutory acquisition and related-party requirements are satisfied. The individual assets, acquisition history and taxpayer relationship still matter.
Does closing before year-end guarantee the deduction?
No. Depreciation generally begins when property is placed in service—ready and available for its intended use. Closing date and placed-in-service date can differ.
Who should coordinate the analysis?
Investors commonly involve a qualified intermediary, CPA or tax attorney, real estate attorney and qualified cost segregation provider. The brokerage team can help organize property and lease information but should not provide tax conclusions.
Primary sources
- Public Law 119-21, Section 70301: 100% expensing for certain business property
- IRS Publication 946: How To Depreciate Property
- IRS: Like-Kind Exchanges — Real Estate Tax Tips
- IRS Instructions for Form 8824
- IRS Publication 551: Basis of Assets
- IRS Cost Segregation Audit Technique Guide
Considering a replacement NNN property? Contact Stonecliff to discuss acquisition criteria, timing and available opportunities.
Stonecliff Real Estate is a commercial real estate brokerage, not a tax, legal or accounting firm. This article provides general education only. Consult qualified tax and legal advisers about your facts, exchange structure, placed-in-service date, state rules, passive activity limits, basis and recapture.
