What is everyone’s experience with assigning depreciation on a mobile home park? Do you need a cost segregation study done or is this something that can be done yourself? If so, is there a step-by-step process that can be used? Finally, are the depreciation percentages/amounts something that could or should be included in the purchase contract? Any insight is appreciated!
You do not need a cost seg but it would be helpful if you were ever challenged. From the IRS’s point of view, it is in the gov’t interest to make sure you do not depreciate too much (you are not too aggressive).
Unless it’s changed by recent tax bill, allowable schedules are:
Land is non-depreciable.
39 years for commercial buildings – like your rec hall
27.5 years for dwellings – like your homes and their major systems (roofs, decks, skirting, central heat & A/C)
15 years for land improvements like fences, plumbing, electrical, roads, signs. I think I put my lift station pumps in this category. 15 years for goodwill also (the “everything else” factor that you pay for beyond the personal property, physical improvements and land).
3-5-7 years for various equipments but I’d probably call these “de minimis” and not list them out.
With that in mind (and keep in mind that’s off the top of my head and not a legal opinion) the IRS is only going to nose into it in two cases:
(1) The IRS does not want “whiplash” between what the Seller claims the property sold for and what you claim you bought it for. If the Seller puts $3mm value on the land and $1mm on other stuff for whatever reason to avoid capital gains or roll over capital gains say into an Opportunity Zone Fund, whereas you tell the IRS it was $2mm land and $2mm other stuff, then they are going to try to reconcile that.
(2) The IRS does not want you to try to postpone paying taxes by expensing too much therefore you have to allocate a reasonable (but minimal) portion of the purchase price to each item and depreciate or amortize these costs over time.
(3) You are supposed to amortize your startup costs including all the bank and survey and legal and professional fees you incurred during your purchase. Just saying.
(4) Depreciation is a non-cash but very real expense. This is very rarely considered or discussed in this forum. Things wear out and you have to put non-operating cash flow (MORE CAPITAL) into your investment periodically, although perhaps not predictably.
(5) In the contract I would specify I’m purchasing real property (exhibit A) and personal property (Exhibit B / everything else) and allocate the price between them in the contract. Within the category of real property, I would not put it in the contract but get something in writing that evaluates the local economic land value. Once the land value is separated from the rest of the real property value, the remainder is 15-year improvements. There’s no need to separate it further EXCEPT insofar as you can write off as worthless (i.e. take an extra deduction) each item you can “replace.”
For example, this is pretty aggressive but you could say “south fence” “north fence” “Street 1 streetlights” “Street 1 paving” “Street 1 sewer” “Street 1 water” “Street 1 electric” “Street 2[portion - utility list it out]” Then as you are replacing/upgrading these things you can write off the old one (it is lost or destroyed or useless when the new thing replaces it … eventually). As you make capital investments into your park you will be able to see the ages of different parts of your infrastructure on your IRS depreciation schedule.
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