Mobile Home PARK Depreciation IRS Schedule?

15 Replies

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!

@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.

@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?

Originally posted by @Amos Smith :

@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?

Yes it is :) The cost varies from firm to firm. feel free to DM for more details. 

In most properties the main building structure, and assets that are essential to the main building are 27.5 year depreciation. But in Mobile Home Parks, if you own the homes, then the structure of of each home will have that depreciation life, but if you do not actually own the homes, just the land, then there is very little that is classified, unless you have a club house, some main electric and plumbing lines will also be 27.5 year. The land allocation (which is not depreciated) is usually higher in MHPs, but that you'l have to clarify.

Hi, I'm picking up on this thread about MHP depreciation.  

I'm close to getting my first MHP under contract and am trying to understand whether my project has any depreciation advantages or not.  Assumptions:

- This park is 100% TOHs so no mobile homes to depreciate

-  No clubhouse, other amenities, or real property to depreciate (the only structure is a small pump building)

- As far as existing infrastructure, the park is on well and septic (multiple systems), sewer/water lines, paved roads, electric to all pads--all that have considerable value when considering replacement costs


I've negotiated a below FMV purchase price directly with the current owner for the amount of the current assessed land tax value (and the tax assessment doesn't reflect any assessed land improvements (buildings) since they aren't any).

Here are the main questions with regard to depreciation:

1)  If my purchase price is the same as the assessed land value, will I have any depreciable basis going into the project in the eyes of the IRS?  I understand that future capital improvements would be depreciable but if none of the value of the existing infrastructure can be applied towards the basis, it obviously changes my after-tax returns significantly. 

2)  If the answer to question 1 is no, can I effectively create a defensible basis by getting a cost segregation done that breaks out the true value of the infrastructure or, would the appraisal suffice since the appraiser would presumably provide a breakout of the infrastructure value?  

3) Could I improve my defense against a future IRS audit by including an allocation of the purchase price to land vs infrastructure (eg., 50/50 ratio) in the purchase sales agreement of the park, or does the fact the county land assessment equal the purchase price supersede that in the eyes of the IRS? 

Thanks,
Joe

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. 

@Joe Hamner Are you hoping that a cost segregation will give you a depreciable basis that is more than your purchase price? Are these 2 things separate when it comes to taxes and establishing a basis?

As you stated there is the land value, which happens to be what you paid for the whole property, and the infrastructure which together should cost considerably more than your purchase price?

Originally posted by @Jon Dorsey :

@Joe Hamner Are you hoping that a cost segregation will give you a depreciable basis that is more than your purchase price? Are these 2 things separate when it comes to taxes and establishing a basis?

As you stated there is the land value, which happens to be what you paid for the whole property, and the infrastructure which together should cost considerably more than your purchase price?

 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/

Hello @Joe Hamner, I agree, the article by @Brandon Hall is very informative. If I may, you asked 3 questions that really have pretty simple answers. So, in order - 

1) yes, you will have depreciable basis due to the fact it is "improved" land. The fact that the tax assessment states it has no improvements is meaningless when you take ownership, and...

2) having a qualified MAI appraisal performed will allocate improvement values based on reality and not "drive-by" opinions as most land-value assessments are. Following that with a forensic cost seg study will further solidify the asset valuation, which leads me to...

3) as long as the seller doesn't care, you can request the allocation of your purchase price be whatever you choose. The smart thing to do, however, is to obtain honest quotes from local vendors who build/install sewer systems for MHPs, electrical/light and water line installation, grading/paving of roads/infrastructure, etc. Then you extrapolate backwards to your purchase price allocation. 

Listen, the Service typically doesn't put up a fight about a land allocation of 20% - 25% of the total purchase price, as long as there are some improvements (Manhattan and similar zip codes excluded). If you do some calling around you'll get the basics of what you need to eventually get to your "cost-basis" to acquire this MHP. 

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

@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.

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

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.

Originally posted by @Denise Mautone :

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.

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

 

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 .