Quick service restaurants and auto service buildings are often marketed as “equipment heavy” for cost segregation. The equipment is real, but in a typical NNN purchase much of it belongs to the tenant, not the buyer. This guide separates what a landlord can actually depreciate from what only the operator can, and shows how 100% bonus depreciation applies to the part the landlord owns.
Key points. (1) On a ground lease the investor owns only land, which cannot be depreciated. (2) On a fee simple purchase, the landlord can depreciate the building and the site improvements it acquires, but kitchen equipment, lifts, menu boards, point-of-sale systems and similar trade fixtures are usually owned by the tenant. (3) Site improvements such as paving, the drive-through lane, curbing, lighting and landscaping are typically 15-year property, eligible for 100% bonus depreciation for property acquired after January 19, 2025. (4) A deduction only saves tax if the investor can use it; rental losses are generally passive.
What the Landlord Owns, and What the Tenant Owns
A cost segregation study assigns the buyer’s depreciable basis (the price less land, plus acquisition costs) to recovery classes: 39-year nonresidential real property for the building, 15-year land improvements, and 5- or 7-year personal property. It can only classify assets the buyer actually acquires. In a typical NNN sale of a franchised or corporate restaurant or service center, the operator keeps its trade fixtures and equipment. Check the purchase agreement and lease to see what conveys.
| Component | Usually Owned By | Typical Recovery Class if Owned by Buyer |
|---|---|---|
| Land | Buyer (fee simple or ground lease) | Not depreciable |
| Building shell, roof, structure, general HVAC, plumbing and electrical | Buyer on fee simple; tenant on a ground lease | 39-year nonresidential real property |
| Paving, drive-through lane, curbing, sidewalks, site lighting, landscaping, fencing, site utilities | Buyer on fee simple | 15-year land improvements (bonus eligible) |
| Kitchen equipment, walk-in coolers, fryers, hood systems installed by the operator | Usually the tenant | 5- or 7-year personal property (tenant’s deduction, not the landlord’s) |
| Lifts, alignment racks, fluid systems, diagnostic equipment | Usually the tenant | 5- or 7-year personal property (tenant’s deduction) |
| Menu boards, ordering systems, point-of-sale, signage | Usually the tenant | 5- or 7-year personal property if owned |
| Interior improvements made after the building was first placed in service | Whoever paid for them | Often 15-year qualified improvement property (bonus eligible) |
General guidance only. Ownership depends on the lease and the purchase contract, and classification depends on an engineering-based study and IRS rules. Consult a tax professional.
Why Drive-Through Sites Still Help
Even when the operator owns the equipment, restaurants and service centers on pad sites tend to have large amounts of site work: parking, a drive-through lane, curbing, lighting and landscaping. Those land improvements belong to the fee simple buyer and are generally 15-year property, so a pad-site restaurant often has a higher share of short-life basis than an interior shopping center space. How much depends on the site, the construction cost of the improvements and the study.
Ground lease warning. Many of the most sought-after quick service deals, including most McDonald’s and Chick-fil-A listings, are ground leases: the tenant owns the building and the investor owns only the land. A ground lease offers no building or site improvement depreciation for the landlord unless the landlord owns specific improvements. Confirm the structure before assuming any depreciation.
Illustrative Example: $2.5 Million Fee Simple Restaurant
The example below shows how the math works under stated assumptions. It is not an estimate for any real property; your own study, purchase allocation and tax situation control.
| Item | Amount | Assumption |
|---|---|---|
| Purchase price | $2,500,000 | Fee simple; tenant owns its kitchen equipment |
| Land | $625,000 | 25% of price, not depreciable |
| Depreciable basis | $1,875,000 | Building and site improvements |
| Reclassified to 15-year site improvements | $375,000 | 20% of depreciable basis, per a hypothetical study |
| Year 1 bonus depreciation | $375,000 | 100% bonus, property acquired after Jan. 19, 2025 |
| Year 1 building depreciation | ~$37,000 | $1.5M over 39 years, mid-month convention, placed in service in January |
| Federal tax value of Year 1 deductions | Up to ~$152,000 | Only if usable at a 37% rate; see below |
The tax value is a maximum, not cash in hand. Rental income from an NNN lease is generally passive, so the deduction first offsets passive income; excess losses are suspended unless the investor qualifies as a real estate professional and materially participates, or until the property is sold. Bonus depreciation is also generally recaptured, largely as ordinary income, on a taxable sale, unless the gain is deferred through a 1031 exchange into qualifying real property.
Auto Service and Collision Properties
Lube centers, tire and service shops and collision centers contain expensive equipment: lifts, pits, fluid systems, spray booths and frame machines. When the operator owns that equipment, which is common, it is the operator’s deduction. The landlord’s opportunity is usually in the building and its site work, and in any building components that the purchase contract confirms the buyer is acquiring, such as service pits and specialized drainage. Ask for an asset list from the seller and have the cost segregation firm confirm ownership before relying on any estimate.
Tenant Credit Still Comes First
Depreciation does not change who pays the rent. Most Taco Bell, Popeyes and Burger King restaurants are franchised, and their parents (Yum! Brands, BB+/Ba2, and Restaurant Brands International, BB+) are rated below investment grade; those ratings apply to a lease only when the parent signs or guarantees it. Chipotle (Not rated) has no agency rating. Starbucks (BBB+/Baa1) is investment grade. See our tenant ratings database and confirm the tenant entity in each lease.
Frequently Asked Questions
Can I depreciate the kitchen equipment in a restaurant I buy?
Only if you acquire it. In most NNN restaurant sales, the operator owns the kitchen equipment and other trade fixtures, so they are the operator’s to depreciate. Confirm what conveys in the purchase contract and lease.
Which parts of a fee simple QSR property usually qualify for bonus depreciation?
Site improvements the buyer acquires, such as paving, the drive-through lane, curbing, lighting and landscaping, are generally 15-year property and qualify for 100% bonus depreciation for property acquired after January 19, 2025. The building itself is 39-year property and does not qualify. Interior improvements made after the building was first placed in service may qualify as 15-year qualified improvement property.
Are McDonald’s NNN properties good for bonus depreciation?
Usually not. Most McDonald’s NNN listings are ground leases, where McDonald’s owns the building and the investor owns only land, which cannot be depreciated. A fee simple McDonald’s can generate depreciation on the building and site improvements the buyer owns.
Will a bonus depreciation deduction reduce my taxes this year?
Only to the extent you can use it. NNN rental losses are generally passive and offset passive income; excess losses are carried forward unless you qualify as a real estate professional and materially participate. The deduction is also generally recaptured on a taxable sale. Have a tax professional model your situation.
Looking for QSR or auto service NNN properties? We source fee simple and ground lease opportunities nationally and review lease structure, tenant credit and what conveys with the property, so your tax adviser can model the depreciation accurately. Tell us your acquisition criteria →
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- 1031 exchange + bonus depreciation combined
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- Gas station and C-store depreciation (the 15-year building tests)
- Medical NNN (dialysis, dental, urgent care)
- Cost segregation guide for NNN properties
- NNN cap rates 2026 quarterly report
- Recession-proof NNN tenants
Disclaimer: This content is for informational and educational purposes only and does not constitute tax, legal, or investment advice. Tax laws are complex, subject to change, and vary by jurisdiction. Examples and figures are illustrations under stated assumptions, not estimates for any specific property. Every property, lease structure, and investor tax situation is different. Always consult a qualified CPA, tax attorney, and cost segregation specialist before making acquisition decisions. InvestmentGrade.com and Investment Grade Income Property, LP do not provide tax advice.
