1031 Exchange for a Quick-Service Restaurant (QSR) or Drive-Thru

Fee owner, ground-lease landlord or leasehold owner: each sells a different piece of the same pad

Quick-service sites are often split between a landowner and a building owner. McDonald's 2025 Form 10-K describes a lease portfolio held mostly through ground leases, where it leases the land and generally owns the building, and improved leases, where it leases both; it says the company generally owns or secures a long-term lease on the land and building, and the franchisee pays for equipment, signs, seating and decor.

Every one of those positions is exchangeable. Treas. Reg. section 1.1031(a)-3 lists fee ownership and a leasehold among the intangible interests that are real property, and Treas. Reg. section 1.1031(a)-1(c) says a leasehold of a fee with 30 years or more to run is like-kind to real estate. A landlord selling land subject to a ground lease, an owner selling land and building, and an operator selling a long leasehold can each send the proceeds to a qualified intermediary.

The tax inside each position differs. Land is not depreciable, so a ground-lease landlord's gain is appreciation alone, taxed as capital gain on a cash sale with no recapture layer. A fee owner who built or bought the building has depreciation to account for, which the next section covers.

The building is 39-year property, but older pads may carry 15-year restaurant depreciation and short-lived drive-thru equipment

A freestanding restaurant building placed in service today is nonresidential real property depreciated over 39 years, and interior remodels are 15-year qualified improvement property under Publication 946. Before 2018, section 168(e)(7) defined qualified restaurant property, a 15-year class recovered on the straight-line method; Public Law 115-97 struck it for property placed in service after December 31, 2017. A pad built in that era may have a far lower basis than its age suggests, and all of that straight-line depreciation is unrecaptured section 1250 gain taxed at up to 25% on a cash sale.

The drive-thru lane itself mixes asset types. The IRS Cost Segregation Audit Techniques Guide, which describes itself as non-binding audit guidance, classes order-taking, food-delivery and payment systems as section 1245 equipment in asset class 57.0 with a 5-year life, and places drive-through service windows and bays in the 39-year building. The paved lane and curbs are land improvements, which Publication 946 places in asset class 00.3 with a 15-year life.

If you, not the operator, own the menu boards and payment hardware, the price allocated to them is ordinary income up to prior depreciation under section 1245 and is not exchange value. Check the lease's fixture clause before you agree a price.

A franchisee's signature and a corporate signature are priced as two different assets

Most quick-service restaurants are run by franchisees: McDonald's reports that about 95% of its 45,356 restaurants were franchised at the end of 2025, and that lease terms for most of its restaurants are generally 20 years where markets allow. When the brand's operating company is the tenant or guarantor, the buyer underwrites a public company's balance sheet. When a franchisee entity signs alone, the buyer underwrites that operator's store sales and its other units.

Net-lease investors buy both. Essential Properties' 2025 Form 10-K shows 461 quick-service properties producing 8.7% of its rent at $39.87 per square foot, and reports that 66.8% of its rent sits under master leases covering multiple sites on an all-or-none basis. A pad tied to a franchisee's master lease sells on the strength of the whole group of stores.

Hypothetical: two identical pads each pay $100,000 of annual rent. One is guaranteed by the brand's corporate parent with 15 years left; the other is signed by a 12-unit franchisee with 6 years left. Buyers will pay materially more for the first, so price your exchange equation on a realistic offer, not on the best comparable, and run your own numbers with your CPA.

Where the proceeds go: another QSR, a ground-leased pad, or a diversified net-lease DST

A ground-leased pad is the cleanest replacement to manage but carries no building to depreciate, so your future deductions shrink. A fee pad with a building gives you a new depreciation schedule on any added basis. Our ground lease strategy guide and leasehold interest page compare the two from the buyer's side.

A diversified net-lease Delaware Statutory Trust spreads the same equity across many tenants, but Rev. Rul. 2004-86 bars the trustee from renegotiating leases or signing new ones except on a tenant's bankruptcy, so tenant credit matters more there than in a pad you own. The traditional DST page covers the structure, and our restaurant building page covers sit-down and owner-operated restaurants.

Buying a QSR or drive-thru as replacement property: confirm the estate, the signer and the lane before day 45

First confirm what estate you are buying. If it is a leasehold, count the years left on the ground lease against the 30-year rule and read who owns the building at expiry; if it is the land under a ground lease, you are buying a rent stream and a future reversion, not a building.

Then read the signature block. Ask whether the lease is signed by the brand's operating company or a franchisee, whether a guaranty exists, whether the site is part of a master lease, and for store-level sales if the lease requires reporting. Check the remaining term against the renewal options, and whether rent rises in fixed steps or with an index.

Finally, look at the site. Drive-thru stacking room, curb cuts and access easements decide whether another operator would take the pad if this one left. Use the three-property rule in Reg. section 1.1031(k)-1(c)(4) to identify a backup, and see single-tenant versus portfolio DSTs if one pad would concentrate too much in one brand.