Real Estate Tax Calc
The example property: a pharmacy NNN building
The numbers below use a realistic single-tenant NNN asset so you can follow each step. All figures are illustrative — actual results depend on your specific property, financing, and tax situation.
| Purchase price | $2,000,000 |
| Cap rate | 5.5% → $110,000 gross annual rent |
| Lease type | True triple-net: tenant pays property taxes, insurance, maintenance directly |
| Land/building split | 25% land ($500,000) / 75% building ($1,500,000) |
| Financing | 65% LTV: $1,300,000 at 6.75%, 25-year amortization → ~$97,650/yr interest (Year 1) |
| Equity invested | $700,000 + $25,000 closing costs = $725,000 |
| Investor tax bracket | 37% ordinary income; 20% long-term capital gains + 3.8% NIIT |
Year 1: basic depreciation (no cost segregation)
Under MACRS, the building depreciates over 39 years using the mid-month convention. For a property placed in service in the middle of the year:
Annual depreciation: $1,500,000 ÷ 39 = $38,462. Using the mid-month convention for a property placed in service in July (5.5 months remaining of a 12-month year): $38,462 × (5.5/12) = approximately $17,644 in Year 1; full years thereafter = $38,462.
Under a true NNN lease, the landlord reports only the base rent — no gross-up for tenant-paid operating costs:
| Item | Amount |
|---|---|
| Gross NNN rent income | $110,000 |
| Mortgage interest deduction | ($97,650) |
| Management/professional fees (est.) | ($3,000) |
| Annual depreciation (39-year MACRS, full year) | ($38,462) |
| Net taxable income (paper loss) | ($29,112) |
The property generates $110,000 of rent but shows a $29,112 paper loss due to depreciation and interest. Actual cash flow before tax: $110,000 − $97,650 (debt service) − $3,000 (fees) = $9,350 positive cash flow.
Passive loss treatment: This $29,112 loss is passive under §469 unless you are a qualifying real estate professional. It can offset other passive income. If you have no passive income, it is suspended and carries forward.
Tax benefit (if loss is usable): $29,112 × 37% = $10,771 in tax savings.
After-tax cash-on-cash (if passive loss is fully usable): ($9,350 cash + $10,771 tax savings) ÷ $725,000 equity = 2.78%. Without the passive loss benefit (loss suspended): $9,350 ÷ $725,000 = 1.3% — below the cap rate because leverage at 6.75% exceeds the 5.5% cap rate. This "negative leverage" effect is a real risk in the current rate environment; use a spread chart when underwriting.
Year 1 with a cost segregation study
A cost segregation study can reclassify personal property and land improvement components of the building — electrical systems serving specialty areas, parking lot, canopy, signage — from 39-year property into 5-, 7-, or 15-year property. With 100% bonus depreciation restored for qualified property placed in service after January 19, 2025, these components can be fully expensed in Year 1.
For a typical pharmacy/retail NNN property, a cost segregation study on a $1,500,000 building might identify:
| Component | Amount | Life / Treatment |
|---|---|---|
| Specialty electrical, plumbing, finishes | $120,000 | 5-year → 100% bonus |
| Fixtures, millwork, interior finishes | $80,000 | 7-year → 100% bonus |
| Parking lot, landscaping, signage | $100,000 | 15-year → 100% bonus |
| Remaining building (39-year) | $1,200,000 | 39-year straight-line |
| Total building basis | $1,500,000 |
Year 1 depreciation with cost segregation:
- Bonus on 5/7/15-year property: $120,000 + $80,000 + $100,000 = $300,000
- 39-year on remaining $1,200,000 (mid-month, full year): $1,200,000 ÷ 39 = $30,769
- Total Year 1 depreciation: $300,000 + $30,769 = $330,769
Year 1 taxable income with cost segregation: $110,000 (rent) − $97,650 (interest) − $3,000 (fees) − $330,769 (depreciation) = ($321,419) paper loss
If the investor has $321,419 or more of other passive income (e.g., from other rental properties), this loss is immediately absorbed. At 37%, the tax savings: $321,419 × 37% = $118,925.
If the investor has no passive income and their MAGI exceeds $150,000, the entire $321,419 is a passive loss carryforward — no current benefit, but it accumulates and releases at sale.
Steady-state cash flow: years 2 through 10
After the cost-segregation bonus in Year 1, the annual depreciation on the remaining 39-year building is $1,200,000 ÷ 39 = $30,769 per year. This continuing depreciation continues to shelter income:
| Item | Amount |
|---|---|
| Gross NNN rent | $110,000 |
| Interest (declining with amortization) | ~$95,000–$75,000 |
| Management/fees | ($3,000) |
| 39-year depreciation (remaining basis) | ($30,769) |
| Net taxable income (approximate, Year 5) | ~$2,000 positive |
By Year 5 or 6, as interest declines with amortization and the depreciation deduction stays fixed, the property will flip from a paper loss to a small paper gain — but cash flow continues growing. This is the natural depreciation "depletion" effect: the shelter value decreases over time as interest is paid down.
The sale: Year 10 tax calculation
Assume the property sells in Year 10 for $2,200,000 (a modest 10% appreciation over 10 years at 0.95% annual growth).
Adjusted basis at sale:
- Original building basis: $1,500,000
- Less: 10 years of 39-year depreciation (Year 1 partial + Years 2–10): ~$17,644 + (9 × $30,769) = $17,644 + $276,923 = $294,567
- Less: cost segregation bonus Year 1: $300,000
- Remaining building basis: $1,500,000 − $294,567 − $300,000 = $905,433
- Land basis: $500,000 (unchanged)
- Closing costs added to basis: $25,000
- Total adjusted basis: $905,433 + $500,000 + $25,000 = $1,430,433
Amount realized: $2,200,000 (sale price) − $60,000 (selling costs) = $2,140,000
Total gain: $2,140,000 − $1,430,433 = $709,567
This gain is taxed in layers:
| Layer | Amount | Tax Rate | Tax |
|---|---|---|---|
| §1245 recapture (cost-seg 5/7-year components) | $300,000 | 37% ordinary income | $111,000 |
| Unrecaptured §1250 (building straight-line depr.) | $294,567 | 25% max rate | $73,642 |
| Remaining §1231 gain (appreciation) | $115,000 | 20% + 3.8% NIIT | $27,370 |
| Total federal tax at sale | $709,567 | $212,012 |
State income tax would add to this total. Any suspended passive loss carryforwards release and offset the gain at sale, potentially reducing the net tax significantly.
The 1031 exchange: deferring the sale tax
Rather than paying $212,012 in federal tax at sale, the investor can execute a 1031 exchange into another NNN property (or other qualifying real estate). The deferred gain and accumulated depreciation carry into the new property's basis, and the tax is deferred indefinitely — potentially until death, when a step-up in basis can eliminate the deferred gain entirely under current law.
For a $2.2M NNN sale with $212,000 of tax deferred, the reinvested capital can compound meaningfully over time. Swapping into a Delaware Statutory Trust (DST) is a common choice when the investor wants NNN exposure without operational involvement — DSTs qualify as like-kind replacement property and have specific dollar amounts that satisfy the exchange's equity and debt requirements precisely.
If the investor does not exchange and instead pays the $212,012 tax plus any suspended passive losses released (which reduce net tax), the after-tax proceeds drive the final investment return. Total after-tax profit: $2,140,000 net sale proceeds − $1,430,433 basis − $212,012 tax = approximately $497,555 total gain after-tax. On the original $725,000 equity investment, this represents a roughly 69% cumulative return over 10 years — before accounting for the annual cash flow and tax shields during the hold period.
QBI deduction: the NNN complication
The 20% qualified business income (QBI) deduction under IRC §199A can apply to rental real estate if the activity qualifies as a trade or business. For NNN properties, this is uncertain. The IRS safe harbor under Notice 2019-07 requires 250 hours of rental services per year — a threshold most passive NNN investors cannot meet. The safe harbor also expressly excludes properties leased under triple net leases from the safe harbor path.
NNN owners who want QBI must establish trade-or-business status on the actual facts. A self-rental (NNN lease to your own operating company) has the strongest footing. A pure passive NNN investment with a single credit tenant on a 15-year lease is genuinely uncertain. Do not assume the QBI deduction when underwriting NNN deals; model it as a potential upside only.
State tax filing obligations
Rental income is sourced to the property's state. An out-of-state NNN owner generally must file a nonresident return in the property's state each year, with the home state crediting taxes paid to avoid double taxation. Some states do not conform to federal bonus depreciation, so the large Year 1 cost segregation deduction may need to be added back at the state level and recovered over time instead — meaningful for high-tax states like California, New York, and New Jersey.
For a NNN portfolio spanning multiple states, the compliance cost is real and recurring. Budget $500–$1,500 per state per year for nonresident returns, and check bonus depreciation conformity before assuming the federal deduction produces an equivalent state benefit.
Frequently asked questions
What is the after-tax yield on a NNN property?
After-tax yield depends on three variables: the depreciation tax shield (which creates paper losses in early years), whether those losses are deductible now or suspended under passive-activity rules, and the eventual recapture tax at sale. For a leveraged NNN at a 5.5% cap rate, an investor in the 37% bracket who can fully use the passive losses can see effective after-tax cash-on-cash returns that exceed the stated cap rate in the early years, until the depreciation advantage erodes as interest declines.
How is a NNN lease taxed differently from a gross lease?
The tax difference is in reporting, not the bottom line. Under a true NNN, the tenant pays property taxes, insurance, and maintenance directly — the landlord reports only base rent as income and cannot deduct expenses it did not pay. Under a gross lease, the same amounts flow through the landlord as income and deductions. Net taxable income is similar either way, but the NNN version produces a simpler Schedule E with far lower gross income and fewer moving parts.
Does cost segregation make sense for a NNN property?
Yes, if the investor can use the accelerated losses. A cost segregation study on a typical NNN commercial property can reclassify 15–25% of the building value into 5-, 7-, and 15-year property eligible for 100% bonus depreciation (for property placed in service after January 19, 2025), creating a large year-1 loss. That loss is passive — it offsets other passive income immediately, or accumulates as a carryforward released at sale. The tax benefit is real but front-loaded; the trade-off is higher §1245 recapture at sale.
What is the recapture tax on a NNN property sale?
Two components: (1) §1245 recapture on cost-segregated personal property components (5/7-year items) — all prior depreciation is taxed as ordinary income up to the amount of gain, at rates up to 37%; (2) unrecaptured §1250 gain on the building's straight-line depreciation — taxed at a maximum 25% federal rate. Capital gain above these recapture layers is taxed at long-term rates (0/15/20%) plus the 3.8% NIIT. The NNN lease structure does not change any of these recapture rates.
Can NNN rental income offset passive losses from other properties?
Yes. NNN rental income is passive by default (unless you are a qualifying real estate professional), which means it can absorb passive losses from other properties — including suspended carryforwards from cost segregation studies on other assets. This passive income generator function is one reason NNN properties are attractive to real estate investors who have built up large passive loss carryforwards from aggressive depreciation strategies on other properties.
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.