The Tax Benefits of Real Estate, Stacked in Order

No asset class gets treated like real estate does — the code subsidizes ownership at every stage. Here’s the complete stack, hold-to-death, as NNN owners actually experience it.

While you hold

Depreciation headlines: deducting a building’s cost over 27.5/39 years shelters rent that arrived as real cash — a $1.5M property with a $1.1M improvement allocation generates roughly $28-40K of annual paper deductions. Cost segregation accelerates slices of it; bonus depreciation rules amplify further in the years Congress allows (VERIFY current percentage — it’s been a moving target). Expense deductions cover the operating stack — interest above all — and QBI’s 20% pass-through deduction reaches many rental activities meeting its requirements. Net effect on a leveraged NNN deal: taxable income far below the cash the mailbox receives.

When you sell

Preferential capital-gains brackets instead of ordinary rates; installment-sale spreading; and the crown jewel — 1031 exchange deferral, letting the entire gain (recapture included) roll into the next property indefinitely. No stock investor gets an equivalent: real estate alone can compound pre-tax across an unlimited chain of sales.

When you’re done

The step-up in basis closes the loop: heirs inherit at market value, the chain’s accumulated deferral evaporates, and depreciation restarts for the next generation. Hold-exchange-hold-die is the complete sentence of real estate taxation, and every clause is legal, ordinary, and used daily.

The honest caveats

Passive-loss rules cage the deductions for high earners who aren’t real estate professionals; recapture waits at 25% for chains that break; and states diverge (a few decouple from federal treats). The stack rewards structure and record-keeping — a CPA who knows property, and income durable enough to be worth sheltering.