Cost Segregation in MHP held in SD Solo 401k?

Question

Is it worth doing a cost segregation study on a Mobile Home Park held in your Self Directed Solo 401(k)?

@Linda Weygant @Yonah Weiss @Dmitriy Fomichenko

Bernard Reisz · Answer

@Mindy Jensen

Great question!

The place to begin is determining what the objective of such a cost seg study might be.

• Is your objective to create losses to offset taxable income from assets that are held outside of the Solo 401(k)?
• Is your objective to offset taxable income from other assets held within the Solo 401(k)?
• Is your objective to offset taxable income on the Mobile Home Park itself?

If your objective relates to #1 or #2 (above), there would be no gain from the cost seg study, for the following reasons:

• Losses don't flow from your Solo 401(k) to your personal return. You and your Solo 401(k) are distinct taxpayers in the eyes of the IRS,
• Trump tax reform has precluded the "netting" of income/loss from separate business activities that are subject to UBIT.

If your objective relates to #3 (above), there would be benefit derived from a cost seg study - assuming the Mobile Home Park investment is truly subject to UBIT.

Linda Weygant · Answer

A solo 401k (unlike a SDIRA) does not pay tax on Unrelated Debt Financed Income.

The closest this kind of investment will come to generating tax for a solo401k is if it is somehow deemed to be generating ordinary income Unrelated Business Taxable Income) on some ancillary service that is being provided.  The basic renting out of mobile homes and/or lots isn't going to do that.

I guess if the management office is, like, also running a convenience store (I've seen that...) that would do it.

So based on that, a Segregation Study would not be all that useful.

Bernard Reisz · Answer

@Yonah Weiss take a closer look at @Mindy Jensen's question - I suspect you saw Mobile Home Park & Cost Seg and never read the end,  indicating that she's dealing with a 401(k) asset. (Hey, I don't blame you - MHP & Cost Seg doesn't require much thought - it's (usually) a "no-brainer!")

Daniel Dietz · Answer

@Mindy Jensen if you owned this with partners and one or more of the partners held their share NOT in a SOLO401K, then the study *might* still be beneficial to *them*.

I will leave it up to the Pros in this field to explain how that might look *if* that is the case. My guess would be say if each of you owned 1/3, then they might benefit from 1/3 of the benefited amount from that study. I would not think you could 'give' them your share of the depreciation, unless say it was an LLC that was set up that way from the start.

Of course *if* you have partners and *they* would benefit and not you, they should also probably be the ones paying for the study.

Dan Dietz

Justin Windham · Answer

@Linda Weygant

It is a great benefit (among many over an IRA), but the exemption is specific to debt-financed real property. Other leveraged assets will generally create taxable UDFI.

Dmitriy Fomichenko · Answer

@Mindy Jensen

Cost segregation study is a tax strategy used to minimize or offset tax liability. Since you own this asset inside of a tax-deferred vehicle the income your 401k generates is not taxable so there would be no benefit for you to do so. In the unlikely event you have UBTI the answer might change, but that would be the case only if you had an active, not passive income.

Justin Windham · Answer

@Linda Weygant

I understand your line of thinking. Real estate is likely the most commonly leveraged asset, especially on these forums. Stock investments using margin would be another example that comes to mind.

In some cases, owner financing can trigger UDFI tax even with real estate but these cases are the exception rather than the rule.

Linda Weygant · Answer

Would that be leveraged assets in ordinary businesses?  I'm not clear on how you'd get a leveraged asset in a passive investment other than real estate that wasn't then UBTI.

I guess in my mind you've either got

A.  Passive Investment with real property

or

B.  Ordinary Income with other types of property (possibly including real property)

I'm having a tough time envisioning a scenario where you've got a passive investment but leveraged assets that aren't real property.

Linda Weygant · Answer

Under what circumstances?  I wasn't aware... I was always under the understanding that the lack of UDFI was the major benefit of solo401k over SDIRA.

Cost Segregation in MHP held in SD Solo 401k?

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