Mobile Home PARK Depreciation IRS Schedule?

Question

Hi,

I recently bought a new mobile home park, my CPA tells me that the non-land portion (road, pipes, water plant, good will) should be depreciated over 28 year.  My CPA has never done tax on MHP before.

I did a search on the web, and many places say that it can be 15 years, but no specifics.  I see there are many smart CPA-types in this forum, can anyone provide me with something specific to tell my CPA that 15 years is OK?

Thanks all!

Yonah Weiss · Answer

@Brendan Hula I just answered you on the MHU forum, but for posterity's sake I'll copy and paste here too :)

Here are the answers to your questions:

1.Many of the ‘land improvements’ (pavement, concrete pads, fencing, landscaping, etc.) depreciate on a 15 year schedule. Water and sewer are usually considered infrastructure, and their values depreciate on a 27.5 year schedule.
POHs can oftentimes be considered personal property and depreciate on a 5 year schedule (only if they are truly ‘mobile’, potentially movable)

2. Yes, any property that depreciates under 20 years is eligible for 100% bonus depreciation.

3. The limitations are more on the individual, not on the property. Normally, rental property income is considered passive and reported on Schedule E. Depreciation (and a whole lot of it with 100% bonus) is a passive deduction, and is used first to offset passive income. Anything beyond that creates a passive loss, and most people are limited in how much passive loss they can use in the current year.

Someone who qualifies as a ‘Real Estate Professional’, does not have the passive loss limitation, and can use those extra deductions to offset ordinary income as well. If you are not a REP, the passive losses will carry forward to future years until they are used up, or until you sell the property.

4. Yes you are correct, depreciation passes through to investors according to their percentage of ownership.

Yonah Weiss · Answer

Jon, your basis for depreciation is your purchase price minus land allocation. The basis can never be more than the purchase price unless capital improvements were made and added to that original basis.

The problem Joe was trying to figure out is how to separate the land allocation (which is not depreciable) from the infrastructure and land improvements, which would add up to be his basis.

That itself is a difficult task in this scenario where the purchase price was the same as the assessed land value by the tax assessor. As suggested on other threads similar to this, and above, there are a number of ways of determining that allocation.

Refer to a great blog article by @Brandon Hall on the subject

https://www.biggerpockets.com/blog/2015/04/19/calculate-improvement-ratio-increase-annual-depreciation/

Yonah Weiss · Answer

@Amos Smith Congrats on your new MHP acquisition!

The value of the property excluding the land allocation can be depreciated. You are correct, that there are different depreciation lives for different assets within the property. What you are referring to is accelerated depreciation, sometimes called cost segregation. Much of mobile home parks can be allocated to a 15-year depreciation, and there are even some portions can be accelerated to 5-year depreciation.

When constructing a new property, those values are usually pretty easy to track with receipts, however when buying an existing property it becomes very tricky to allocate values to these different assets. That's why there are qualified cost segregation engineers who are well versed in the tax code, and can properly allocate those values.

Brendan Hula · Answer

Thank you Yonah!

LOL, yeah, I kind of spammed this question across BP & MHU. Very impressive your name came up on MHU as well as the recognized expert in this area. I really appreciate you taking the time to  answer my question and also sharing it across the two forums for the benefit of the communities.

Brendan

Paul Moore · Answer

Hi @Amos Smith. It's been 2 years since you posted this question and we would love to hear what conclusions you came to.  The math for being able to create losses equal or greater to the equity portion of an investment in a mobile home park is quite simple for many parks, assuming there is 50%+ or so leverage. I have the math to show this if anyone wants to see it. Thanks for the insightful comments, @Yonah Weiss.

Boomer Philbrick · Answer

I've seen cost segregation studies on MHP have great benefit even when the property owner doesn't own the homes. There's a lot of 15 year property (common areas, facilities, ground hookups, electrical hookups, pads, etc.). It's definitely worth getting a no-cost analysis on your property to see what benefit you might be looking at.

Yonah Weiss · Answer

Thanks Denise! Great to see you here on BP too!

Denise Mautone · Answer

Brendan, Yonah is the cost segregation king for a reason.  I'm not surprised to look up cost segregations studies specific to MHP assets, when  low and behold, Yonah was on the thread!  I saw some answers to many of my own questions, great thread.

Brendan Hula · Answer

To piggyback on this thread, I had a few questions I was hoping the group might be able to help answer or point me in the right direction. I've tried speaking with the IRS directly as well as researching online but haven't had much luck finding answers.

I am working to acquire a portfolio of manufactured housing communities. My questions are:

1. Other than the land component, is the infrastructure (roads, pads, water & sewer lines, etc.) eligible for depreciation over a 15 year period? (Based on this thread, sounds like the answer is "yes"). Would Park Owned Homes qualify as personal property and be depreciable over a 5 year period?

2. If the above is true, then would these items also qualify for the Bonus Depreciation rules and be 100% depreciable in year 1?

3. What are the allowable deduction limits? If the year 1 Bonus Deprecation exceeds the deduction limit are you allowed to carry forward these deductions in subsequent years until they are exhausted?

4. We have a group of investors, I'm assuming the depreciation benefits can be passed-through to this group in order to offset our cash distributions. Is that correct?

Thank you,

Brendan

Amos Smith · Answer

@yonan weiss  Thanks very much for your response, sounds like this is in your wheel house.  What is the rough cost of doing one of these allocation study?  Also what types of stuff in a MHP will require a longer than 15 yr depreciation?

Mobile Home PARK Depreciation IRS Schedule?

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