Investors choosing between directly owning a net lease (NNN) property and investing as a limited partner (LP) in a syndication often focus on returns. The tax treatment differs too, though less than marketing on either side suggests. This guide explains how depreciation, bonus depreciation, passive loss rules and 1031 exchanges apply to each, with a worked example that holds leverage constant. It is part of our investment grade net lease research; see also the investment grade guide. It is general information, not tax advice.
Related: Gas Station Bonus Depreciation
Depreciation on a Directly Owned Net Lease Property
Commercial buildings are depreciated over 39 years on a straight-line basis; land is not depreciable. Depreciation begins when the property is placed in service, meaning ready and available for its intended rental use, and nonresidential real property uses a mid-month convention in the first and last years.
Example: an investor buys a $3,000,000 net lease property and allocates 20% of the price to land and 80% to the building. The depreciable basis is $2,400,000, and a full year’s depreciation is $2,400,000 ÷ 39 = $61,538. Depreciation is based on the cost of the property, so it is the same whether the purchase is financed or paid in cash.
Ground leases are different. If you buy land that is ground leased to a tenant that built and owns the building, as is common with many quick-service restaurant pads, you own no building and generally have no depreciation deduction. The lower cap rates on these assets should be compared on an after-tax basis.
Cost Segregation and Bonus Depreciation
A cost segregation study allocates part of a property’s cost to components with shorter recovery periods, such as 5-, 7- and 15-year property (for example, certain site improvements, parking areas and some fixtures). The One Big Beautiful Bill Act permanently restored 100% bonus depreciation for qualifying property acquired and placed in service after January 19, 2025; the IRS issued interim guidance in Notice 2026-11. Bonus depreciation applies to property with a recovery period of 20 years or less, not to the 39-year building itself, and used property can qualify if the acquisition requirements are met.
Cost segregation is available to direct owners of net lease properties as well as to syndications; how much it accelerates depends on the property. Accelerated deductions bring forward tax savings but increase the gain taxed at sale: depreciation on personal property components is generally recaptured as ordinary income, and depreciation on the building is taxed as unrecaptured Section 1250 gain at up to 25%.
Passive Loss Rules Apply to Both
Rental real estate is generally a passive activity whether you own it directly or as an LP. Depreciation that creates a tax loss can offset other passive income; losses that cannot be used are carried forward and become usable when you sell the property or your interest. Two exceptions matter:
- Real estate professionals who meet the hours and material participation tests can treat rental losses as non-passive.
- The $25,000 allowance for individuals who actively participate in a rental phases out between $100,000 and $150,000 of modified adjusted gross income. A direct owner may qualify; a limited partner generally cannot, because limited partners are not treated as actively participating.
An LP can also deduct losses only up to its tax basis and amount at risk in the partnership. A share of partnership debt can count toward both, depending on the type of loan.
How Syndication Tax Items Are Allocated
A syndication is usually taxed as a partnership. Income, deductions and depreciation pass through to partners on Schedule K-1, divided according to the partnership or operating agreement. Allocations do not have to be pro rata to capital: the tax rules permit special allocations if they have substantial economic effect, and they are sometimes used to reflect a sponsor’s guarantees or other contributions. Before investing, read the agreement’s provisions on:
- how depreciation and losses are allocated, including any special allocations;
- how capital accounts are maintained and how the distribution waterfall interacts with tax allocations;
- whether the sponsor plans a cost segregation study and bonus depreciation;
- the property’s leverage, which affects both deductions and your basis.
A tax advisor can review these provisions with you.
Worked Example: Same Equity, Same Leverage
Assume an investor has $500,000, every property allocates 80% of its price to a 39-year building with no accelerated depreciation, and syndication depreciation is allocated in proportion to equity.
| Scenario | Property price | Debt | Investor’s share of building basis | Annual depreciation to investor |
|---|---|---|---|---|
| Direct NNN purchase, two-thirds financed | $1,500,000 | $1,000,000 | $1,200,000 | $30,769 |
| Syndication, two-thirds financed ($500,000 is 7.5% of $6.67M equity) | $20,000,000 | $13,333,333 | $1,200,000 | $30,769 |
| Syndication with no debt ($500,000 is 2.5% of $20M equity) | $20,000,000 | $0 | $400,000 | $10,256 |
| Direct NNN purchase, all cash | $500,000 | $0 | $400,000 | $10,256 |
At the same leverage and with proportional allocations, the investor receives the same depreciation whether the property is owned directly or through a syndication. Comparing a financed direct purchase with an unleveraged syndication makes the direct purchase look three times better, but the difference comes from leverage, not from the ownership structure. Real differences come from the actual allocation terms, cost segregation, and each investor’s ability to use passive losses.
Development Deals: When Depreciation Starts
Depreciation on a new development begins when the property is placed in service: when it is ready and available for its intended use. Full lease-up or economic stabilization is not required. During construction, costs are generally capitalized rather than deducted, so development investments usually provide little depreciation in their early years. Construction delays push back the placed-in-service date, and therefore the deductions. An acquired, already-operating net lease property is generally placed in service when the buyer acquires it.
1031 Exchanges and Exit
A direct owner can sell and defer gain by exchanging into other real property under Section 1031, provided the identification and closing deadlines and other requirements are met. An interest in a partnership is not real property, so an LP generally cannot exchange its syndication interest; Delaware statutory trust interests can qualify as real property for exchange purposes. A syndication can sometimes do an exchange at the partnership level, but that decision belongs to the sponsor.
| Direct net lease ownership | LP in a syndication | |
|---|---|---|
| Depreciation | All of it, on your own schedule | Your allocated share, per the agreement |
| Cost segregation and bonus depreciation | Your decision | The sponsor’s decision |
| $25,000 active participation allowance | Possible, subject to income phase-out | Generally not available |
| 1031 exchange on sale | Available | Generally not available for the LP interest |
| Tax reporting | Your own return | Schedule K-1, sometimes filed late |
Considering a Net Lease Purchase?
We can help you find and evaluate investment grade net lease properties, including 1031 exchange replacement properties, against current listings. On the majority of transactions, there is no separate fee to you as the buyer for representation; the listing broker pays a cooperating commission. Work with your own tax advisor on depreciation and exchange planning.
Frequently Asked Questions
When does depreciation start on a new development?
When the property is placed in service, meaning ready and available for its intended use. It does not wait for full lease-up or stabilization.
Does a syndication give less depreciation than owning directly?
Not inherently. With the same leverage and proportional allocations, the depreciation per dollar invested is the same. Differences come from leverage, the agreement’s allocation terms, cost segregation, and your ability to use passive losses.
Is bonus depreciation available in 2026?
Yes. The One Big Beautiful Bill Act permanently restored 100% bonus depreciation for qualifying property acquired and placed in service after January 19, 2025. It applies to components with recovery periods of 20 years or less, which a cost segregation study can identify, not to the building itself.
Do ground lease owners get depreciation?
Generally not, if the tenant built and owns the building. Land is not depreciable, so the landlord’s income from a ground lease is usually not sheltered by depreciation.
Can a limited partner use a 1031 exchange?
Generally not for a partnership interest, because it is not real property. Delaware statutory trust interests can qualify. Consult a tax advisor before relying on any exchange strategy.
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