Mobile Home Park Investing: Legal Tax Reduction Strategies

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Taxes are always top of mind this time of year. But shouldn’t tax mitigation be top of mind year round? It’s shocking how little attention most investors devote to tax planning within their investment portfolios. Last time I checked, a dollar saved in taxes is a just as valuable as a dollar earned.

It’s not a coicedence that those that can most afford to ignore the effect of taxes on their returns – the uber-wealthy – are laser focused on tax reduction investment strategies. This is why some very wealthy people LOVE mobile home park investments, as they are remarkably tax efficient.

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Mobile Home Park Investing = Accelerated Depreciation

Mobile home park investing offers investors accelerated depreciation relative to other real estate investments. Mobile home park improvements (utility lines, roads, etc.) are often allocated 50-75% of the total purchase price for tax purposes. These items are depreciated over a 15 year schedule vs 27.5 years for apartment buildings and 39 years for commercial buildings.

Therefore, not only do mobile home parks generate outsized cash flow returns, but most of this income is tax “free”. When the infrastructure is fully depreciated the basis can simply be transferred to another asset via a 1031 exchange. Of course, if the property is sold, capital gains and depreciation recapture taxes (25%) would be owed, but at lower rate than many investors’ marginal tax bracket. The ability to depreciate a productive and appreciating asset is sweet deal; but the accelerated depreciation afforded to mobile home park owners is an absolute gift from the government.

Related: How Much Do You Know About Investing In Mobile Homes?

Value Allocation to Determine Depreciable Basis

The large percentage value allocation to infrastructure vs. land is a bit counterintuitive as a mobile home park investor owns the land and leases it to mobile home owners. Of course there isn’t much wear and tear associated with dirt, so land isn’t depreciated. However, for parks not located in crazy high land value markets (I’m looking at you California), the majority of a mobile home park’s value can be allocated to its infrastructure.

Take for an example the following Mobile Home Park component valuation and depreciation schedule calculation which is fairly typical of a smaller (50-75 pads) park in the markets my firm targets:

Sample Mobile Home Park Depreciation Schedule

The land on this property accounts for 30% of the overall value. Hence the depreciable basis is $700K. At a blended 15.25 year schedule, the straight line depreciation per year is $45,902 or a hefty 4.6% of the purchase price.

Protecting Yourself From an IRS Audit

Bear in mind, real estate value allocation is fairly subjective. Consequently, mobile home park investors need to ensure they have sufficient evidence to support component valuation assumptions in case of an audit. This evidence might come in the form of a property tax assessment, which breaks out the value of the land, or perhaps via land sale comps (value per acre). To further support their allocation, a mobile home park owner can commission a cost segregation study, which is a detailed 3rd party’s opinion of the allocated value and should help resolve an IRS inquiry.

Mobile Home Park Investing = Substantial After-Tax Cash Flow Returns

Here is the tax impact of the accelerated depreciation schedule from above on the same hypothetical property:

Mobile Home Park Cash Flow

 Related: How to Quickly Analyze A Mobile Home Park for Sale as a Buyer

This sample $1mm mobile home park generates $47K in cash flow after debt service. With a 25% downpayment, this equates to a 19% cash on cash return. Thanks to the benefits of depreciation (with a little help from the interest deduction) the owners of this asset only owe Uncle Sam $5.8K in taxes, which results in a 17% after tax cash flow return. Not too shabby.

Keep in mind, this is a year 1 cash flow return, which doesn’t include the benefits of loan principal reduction nor does it account for any assumed appreciation (rent increases, occupancy improvements, etc.). This puts a mid-20% IRR over the investment hold period well within reach and is precisely why we love mobile home parks – if we do nothing to improve the park (highly unlikely) we are already well ahead of the game on an after-tax return basis.

Most real estate investors focus on the gross (before tax) investment returns when evaluating investments.  However, the ultimate goal should be to maximize net (after tax) proceeds. After all, you cannot live off of before tax returns – unless you enjoy speaking with IRS agents – and its not how much you make, it’s how much you keep.

To be honest, I’m guilty of focusing on before tax returns as well. But I have a pretty good excuse – when your business is mobile home park investing, taxes are not a significant drag on returns.

What are your thoughts?

About Author

Brad is the co-founder of Park Street Partners, a private real estate investment firm focused on mobile home park investments. Park Street Partners seeks to deliver outsized cash flow returns through syndicated real estate investments to help its investors achieve their financial goals.

9 Comments

  1. Hi Brad, I’m in the market to buy a MHP here in GA within 1-2hrs drive from Atlanta. I’ve looked at a few that are forsale. But they where wrecks, 1980’s trailers, 1/3 wreched and needing removal, 40% empty lots lots of trash. The financials listed $2k spent on maint in 2013. LOL I actually think that’s not a fib, but the truth. I’m looking for a few experts to bounce deals off for advice. Might you be willing to give me quick look overs and comment on deals I turn up? I’m working with a Marcus & Milic broker.
    I’m more familiar with apartment (MF) deal analysis, snooping expenses for the missing expenses that boost NOI, and rent roles that where recently put in without good back ground checks and the like. What are the hot spots in investigating MHP financials? Rent rolls and length of stay of each pad… What else?

    FWIW I’m well aware that the goal is not to own MHPs with much rented trailers. I know I need to be owning 100% owner occupied. I’m well read on Dodd Frank, no need to get into that new PIA area here.

    Any tips on how else to find MHP inventory to bid on? Is a yellow letter campaign even worth the effort?

    Thanks Curt

  2. Hello Brad. Thanks for the information! You’re right, it’s not about how much you make, it’s how much you keep. Most people seem to focus on the amount they make instead of how much they keep. I’m glad I came across this article; it was another reminder of how great MHP’s are. I have always been interested in MHP’s but never made the leap. They seem like a good strategy for any investor to look at. Please keep posting great articles like this one.

  3. This showed up at the perfect time. I just finished my business taxes for the year on Liberty Estates, and I will need all the phantom depreciation I can get for next year. I have owned that mobile home park for a little over 4 years, and I have tripled the income to date, so all the tax strategies above will help. It will help my others parks too, but I was running out of strategies for the biggest producer. For the commenters above thinking about getting into mobile home parks there is little in common with multi family. If you want an experienced consultant on retainer I encourage you to contact me. 702-981-0866.

  4. Curt Smith

    Kurt, MF can gain the same type of shorter depreciation by doing cost segregation, which is not simple or cheap. My view of the above example is that a similar tactic is being used segregating value into shorter than the default 27.5yr life values. Infrastructure is being depreciated as 15yr in the above example, to me this is segration.

    Anthony, as long as the RV park has pipes, wires. My guess is that roads will still be 27.5 yr property. The point of the above is that “infrastructure” is being given 15yr. But the IRS/statutory rational for saying pipes in the ground are 15 yr was NOT given, so I’m not convinced yet of the above math.

    It was said that you have to take “care” in determining value of your infrastructure. To me this says, this is a a nice story without the legal basis for actually putting this tactic into practice.

    I’m sure it will be said: hire a competent CPA who is an expert in parks and THIS tactic… There’s more needed to actually act on this.

  5. Brad, Great summary of the tax advantages of MHP ownership. I bought a part in northern Minnesota last summer and I am going into the first year of tax filing. I would very much like to get it correct from the start (apologize for stating the obvious).

    Curt S. made a comment above (Jan 26, 2016) questioning the IRS statutory reference for the 15 year depreciation. Any CPA’s out there willing to comment on this? It would be of great value. Thx.

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