A recent policy change out of Washington is beginning to influence how retail real estate is being evaluated, marketed, and transacted.

 

The “Big Beautiful Bill,” passed in July 2025, restored 100% bonus depreciation for qualifying assets. While tax policy does not always translate into immediate movement in the investment sales market, this change has had a noticeable impact on investor behavior in a relatively short period of time.

 

To understand why, it helps to look at what changed.

 

Bonus depreciation was expanded in 2017 under the Tax Cuts and Jobs Act, allowing investors to immediately expense 100% of qualifying depreciable assets. Beginning in 2023, that benefit began to phase out, stepping down by 20% annually, declining to 80%, then 60%, with further reductions scheduled in the years ahead. By early 2026, most investors had already adjusted underwriting assumptions to reflect a continued reduction in depreciation benefits.

 

Bonus Dep % vs. Year

Source: Thomson Reuters

The restoration of 100% bonus depreciation effectively reset those expectations.

 

Amid higher interest rates and tighter lending, accelerated depreciation has improved after-tax returns across retail assets, at times influencing acquisition timing and pricing.

Why Retail Responds Quickly to Tax Policy

Retail real estate, particularly assets tied to operating businesses, tends to include a meaningful amount of depreciable value beyond the building itself.

 

According to Internal Revenue Service guidance and industry cost segregation studies, retail real estate, particularly assets tied to operating businesses, often includes a meaningful amount of depreciable value beyond the building itself. In addition to structural components, these properties frequently incorporate site work, specialized improvements, and operational infrastructure. As a result, investors can typically reclassify 20% to 40% of a retail asset’s purchase price into shorter-life categories, with higher allocations possible in more infrastructure-intensive assets.

 

With 100% bonus depreciation in place, those amounts can be expensed immediately, creating a concentration of tax benefits in the early years of ownership. In many cases, first-year depreciation deductions are sufficient to offset a significant portion of taxable income, improving near-term cash flow and enhancing overall return profiles.

 

This dynamic is particularly relevant in net lease retail, where the buyer pool includes a large concentration of private investors and family offices. These groups tend to evaluate investments on an after-tax basis, which means changes in depreciation policy can directly influence both demand and pricing behavior.

A Noticeable Shift in Market Activity

The market response following the bill’s passage has been relatively immediate.

 

Brokerages across multiple regions have reported an increase in investor outreach within weeks. At the same time, more assets began to come to market, particularly from owners who had delayed dispositions while depreciation benefits were declining.

 

Transaction timelines have also begun to compress. Retail net lease deals that would typically take three to six months from initial listing to closing have, in a growing number of cases, traded in under 60 days. This has been most evident in assets where depreciation benefits are both material and straightforward to quantify during underwriting.

 

Buyers are approaching these opportunities with greater clarity. When a significant portion of a property’s value can be depreciated immediately, the impact on returns can be modeled early in the process, which has allowed for more decisive bidding and faster execution.

 

1031 exchange activity has further contributed to this trend. Investors redeploying capital are increasingly pairing exchange proceeds with accelerated depreciation, creating a more compelling reinvestment profile and, in some cases, increasing competition for assets with strong tax attributes.

Pricing Stability, with More Variation Beneath the Surface

Despite broader capital market headwinds, cap rates across several retail segments have remained relatively stable.

 

While borrowing costs remain elevated, the improvement in after-tax yields has helped support pricing. Accelerated depreciation has allowed some investors to maintain target return thresholds even without a corresponding increase in nominal cap rates.

 

At the same time, pricing has become more differentiated.

 

Assets with strong fundamentals and meaningful depreciable components continue to attract consistent demand. In many cases, these properties are trading in the mid-5% to low-6% cap rate range, depending on tenant quality, lease structure, and location. By comparison, assets with more limited depreciation potential or weaker operating characteristics are experiencing more selective demand.

 

This widening separation reflects a broader shift in how investors are evaluating retail opportunities, with greater emphasis placed on both income durability and tax efficiency.

Where the Impact Is Most Pronounced

The effects of accelerated depreciation are most visible in retail assets where infrastructure and equipment represent a substantial portion of value.

 

In these cases, cost segregation studies often allocate between 40% and 60% of the purchase price to shorter-life assets, allowing investors to capture significant first-year deductions. The ability to immediately expense those components has materially improved year-one cash flow for many acquisitions.

 

Properties with extensive site improvements, mechanical systems, or specialized operational components have been the primary beneficiaries. Investor demand for these assets has remained consistent, supported by both tax advantages and stable underlying performance. Locations with strong throughput, established operators, and reliable revenue streams continue to attract a broad buyer pool.

 

The impact of restored bonus depreciation has been most pronounced in retail asset classes where infrastructure, equipment, and site improvements represent a significant portion of total value.

 

Gas Stations

 

Gas stations and convenience stores are among the clearest examples. These properties tend to be among the most depreciation-heavy in the retail landscape, with substantial capital tied to underground storage tanks (USTs), fuel systems, canopies, and related site work. Under current tax treatment, a convenience store property may qualify as a retail motor fuel outlet if it meets one of several IRS criteria, including generating at least half of its gross revenue from fuel sales, dedicating at least half of its floor area to petroleum-marketing activity, or maintaining a building size of approximately 1,400 square feet or less. When a property satisfies one of these tests and is placed in service during a bonus-eligible year, investors may be able to deduct a substantial portion, potentially the full purchase price less land value, which is commonly estimated at around 20%, in the first year. Even if a site does not fully qualify under these tests, cost segregation studies still commonly reclassify roughly 25% to 50% of the acquisition value into shorter-life assets, allowing for accelerated depreciation. As a result, investor interest in fuel retail portfolios has increased, cap rates have remained relatively stable despite broader market uncertainty, and demand continues to center on high-volume locations operated by experienced groups.

 

Car Washes

 

Car washes have shown a similar pattern in the market, often to an even greater degree. With extensive mechanical systems and equipment-driven operations, these assets are particularly well suited for accelerated depreciation. In practice, allocations can exceed 50% of total project cost, and in some cases move materially higher depending on the format and equipment mix. When car washes are developed as freestanding tunnel formats, many of the structural and equipment components may also qualify for 100% bonus depreciation under current tax treatment. That dynamic can meaningfully improve acquisition economics, which has supported continued investment from private equity-backed operators and sustained buyer demand, especially for express tunnel formats.

 

QSR

 

Quick service restaurants have also benefited, though to a slightly lesser degree. While typically anchored by long-term net leases and strong national brands, these properties still include meaningful interior buildout and equipment value. Cost segregation studies commonly place 20% to 35% of total value into shorter-life categories. From an underwriting perspective, the return of bonus depreciation has helped support transaction activity, largely by enhancing after-tax returns. Investor demand remains concentrated in drive-thru locations and high-traffic sites, with cap rates holding relatively steady across much of the segment.

 

Even in less equipment-intensive categories, such as dollar stores, the effects are still evident. Although these assets generally offer lower depreciation allocations, often in the range of 15% to 25%, they remain highly liquid within the net lease market and are widely favored by private investors seeking stable income. The incremental benefit of accelerated depreciation has modestly improved overall return profiles, contributing to continued demand for operators such as Dollar General, Family Dollar, and Dollar Tree, particularly in secondary and tertiary markets.

Regional Differences in Impact

The influence of restored bonus depreciation has not been uniform across the country.

 

In high-tax states, the value of accelerated depreciation is more pronounced. Investors with greater tax exposure are able to realize larger immediate savings, which has contributed to stronger demand in markets such as California and parts of the Northeast.

 

Markets with higher underlying real estate values have also seen more noticeable effects, particularly where improvements and infrastructure represent a larger share of total asset value.

 

Across the Sunbelt and Southeast, activity has increased as well. Population growth, expanding retail corridors, and a deep pool of private capital have combined with the tax change to drive additional transaction momentum. States such as Texas and Florida continue to see elevated levels of activity, particularly for necessity-based retail assets tied to daily consumer demand.

Regional Leaders in Retail Transaction Activity (Q1 2026)

Source: CoStar Group, Inc.

A Shift in Underwriting and Investment Strategy

The return of 100% bonus depreciation is influencing how retail investments are being evaluated at a more fundamental level.

 

Cost segregation is increasingly being incorporated into initial underwriting rather than treated as a post-acquisition consideration. Investors are placing greater emphasis on how much of a property’s value can be depreciated quickly and how those deductions align with their broader tax position.

 

This has led to a more detailed evaluation of asset composition, including site improvements, equipment, and other depreciable components. In turn, tax strategy is becoming more integrated into acquisition decisions alongside traditional considerations such as tenant credit, lease structure, and location.

 

For sellers, this shift underscores the importance of understanding how their assets perform from a tax perspective, as properties with stronger depreciation profiles are often attracting a broader and more competitive buyer pool.

The Broader Implication

Real estate markets typically adjust gradually, with changes in interest rates, rent growth, and supply conditions influencing pricing over time. Tax policy tends to operate on a different timeline, often creating more immediate shifts in investor behavior.

 

The return of 100% bonus depreciation illustrates how a single legislative change can influence transaction activity, deal velocity, and pricing dynamics across the retail sector. It has also reinforced the importance of after-tax returns in investment decision-making, particularly among private investors.

 

In sectors where infrastructure and equipment make up a meaningful share of asset value, the effect has been especially noticeable, as accelerated depreciation directly enhances early-year cash flow and overall return profiles. As a result, investors are placing greater emphasis on these characteristics when evaluating opportunities, and that shift is increasingly reflected in both transaction activity and market positioning.

 

For investors, this environment makes it increasingly important to look beyond surface-level metrics. Identifying assets where tax efficiency can meaningfully enhance returns may create a distinct advantage, particularly as competition increases for these property types. Looking ahead, the interplay between tax policy and fundamentals will remain a key factor in how capital is allocated across the retail landscape.