What a triple net lease shifts to the tenant
Under a triple net (NNN) lease, the tenant pays property taxes, building insurance, and maintenance costs in addition to rent. From a tax perspective, this means the landlord reports less gross rental income (no reimbursed expense income) and also deducts fewer expenses — the net effect is roughly a wash. In some NNN structures, the tenant pays the operating expenses directly and the landlord never touches them.
On Schedule E (or a business return), a NNN landlord reports only the base rent as income, without the gross-up for tenant-paid operating costs. This simplifies bookkeeping but does not change the fundamental tax treatment.
Depreciation, recapture, and basis
Depreciation of the building still applies exactly as it would for any commercial property — typically 39-year straight-line under MACRS. A cost segregation study can identify shorter-life components, accelerating deductions. All accumulated depreciation is subject to recapture at sale, regardless of the lease structure.
The NNN lease term often runs 10–20 years, and the creditworthiness of the tenant drives value. When you sell, the buyer is buying a yield, and the valuation can differ significantly from a traditional cap-rate analysis — but the tax gain calculation (amount realized minus adjusted basis) is the same.
The QBI deduction for NNN landlords
NNN properties have faced uncertainty under the qualified business income (QBI) deduction. The IRS safe harbor in Notice 2019-07 requires 250 hours of rental services per year, which triple net lessors rarely meet. However, the safe harbor is not the only way to qualify — many practitioners argue that NNN rental can still qualify as a trade or business under the general standard of Groetzinger if the investor is actively involved in managing tenants and property affairs.
Frequently asked questions
Do I still depreciate a NNN property?
Yes. The lease structure doesn't affect depreciation. Commercial NNN buildings depreciate over 39 years using the mid-month convention.
Is NNN rental income subject to self-employment tax?
No. Rental income, including NNN rent, is not subject to self-employment tax.
Can I do a 1031 exchange on a NNN property?
Yes. NNN investment properties are held for investment and qualify as like-kind real property for 1031 exchange purposes.
Sources
- IRS Topic No. 409 — Capital Gains and Losses
- IRS Publication 544 — Sales and Other Dispositions of Assets
- IRS Publication 946 — How to Depreciate Property
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.