Commercial real estate has long been a favored investment option, offering the potential for stable income streams and capital appreciation. Among the various commercial property types available, gas stations and convenience stores (c-stores) have gained prominence in recent years. One key reason for this is the significant tax advantages associated with owning such properties, particularly the ability to utilize bonus and accelerated depreciation.
The Tax Cuts and Jobs Act (TCJA) of 2017 introduced a game-changing opportunity for investors in gas station properties. This legislation allows for an accelerated depreciation schedule, enabling property owners to maximize their tax benefits. In this article, we will explore the benefits of investing in gas station properties, focusing primarily on bonus depreciation, and how it can significantly enhance your financial position as a commercial real estate investor.
Bonus Depreciation Explained
Under the TCJA, gas stations and c-stores that qualify as a ‘retail motor fuel outlet’ have the unique advantage of electing a depreciable life of 15 years instead of the standard 39-year depreciable life of ordinary real estate. This shorter depreciation period can translate into substantial tax savings for property owners. Moreover, the TCJA allows for up to 80% bonus depreciation of qualified property through 2023, with gradual phase-outs until 2027.
Let’s illustrate the concept with an example:
Imagine you decide to invest in a gas station property with a total purchase price of $3,500,000, with 15% allocated to the land value. In 2023, the maximum bonus depreciation you can claim is 80% of the entire purchase price minus the land value.
Here’s how this would work:
Total Purchase Price: $3,500,000
Land Value (15% of the total): $525,000
Depreciable Value: $3,500,000 – $525,000 = $2,975,000
With an 80% bonus depreciation rate, you can deduct 80% of the depreciable value from your taxable income in the year of acquisition:
Bonus Depreciation Deduction: 80% x $2,975,000 = $2,380,000
So, in this example, you could immediately deduct $2,380,000 from your taxable income in the year you purchased the gas station property. This substantial tax benefit can have a significant impact on your overall financial position, making the investment in gas station properties highly advantageous from a tax perspective.
Qualifying for Bonus Depreciation
While it’s always advisable to consult a tax advisor for specific guidance, there are some general criteria that can help determine whether your gas station property qualifies for bonus depreciation. The IRS issued Coordinated Issue Papers (CIP) for the Petroleum and Retail Industries Convenience Stores in the late 1990s, providing a comprehensive definition and qualifying criteria. According to these guidelines, a c-store at a gas station qualifies as a “retail motor fuel outlet” if it meets any of the following criteria:
If your gas station property meets any of these criteria, the entire depreciable basis (excluding land) becomes eligible for a 15-year recovery period and 80% bonus depreciation if acquired and placed in service after September 27, 2017.
Advantages of Accelerated Depreciation
Now that we’ve explored the concept of bonus depreciation and qualifying criteria, let’s delve into the advantages of accelerated depreciation for gas station property investments:
For example, if you acquired a gas station property for $6 million, the ability to deduct $3,840,000 from your taxable income in the year of purchase significantly reduces your initial financial outlay.
By taking advantage of bonus depreciation, you can allocate a higher portion of the property’s value to depreciation expenses in the earlier years of ownership, reducing your taxable income and overall tax liability.
Suppose you have other taxable income sources. In that case, the ability to defer taxes on the income generated from your gas station property can provide you with additional funds for reinvestment or diversification.
Investing in gas station properties as commercial real estate assets can offer significant advantages, especially when it comes to leveraging bonus and accelerated depreciation. The Tax Cuts and Jobs Act of 2017 opened the door to substantial tax savings for investors in these properties, allowing them to write off a substantial portion of the asset’s value in the year of acquisition.
The ability to reduce initial costs, claim higher deductions upfront, and defer taxes makes gas station properties an attractive option for savvy investors seeking to optimize their real estate portfolios. However, it’s essential to consult with tax professionals to ensure that your property qualifies for bonus depreciation and to navigate the intricacies of tax law effectively.
In conclusion, gas station property investments offer a unique opportunity to combine the stability of commercial real estate with the tax advantages of accelerated depreciation. As with any investment, thorough research and professional guidance are crucial to maximizing the potential benefits and ensuring a successful venture in the dynamic world of commercial real estate. Contact us directly for what guidance and insight we can provide to your specific situation.