MHC - Depreciation

mobile home university
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Hello MHU Community!

I am working to acquire a portfolio of manufactured housing communities and have a few questions regarding depreciation I was hoping to find answers to or be pointed in the right direction. My questions are:

  1. Other than the land component, is the infrastructure at the community (roads, pads, water & sewer lines, etc.) eligible for depreciation over a 15 year period? 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!

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If you are on Linked In connect with Yonah Weis. If not contact me and I will connect you.

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Thanks for the shoutout!

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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 often times 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 to 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.

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Amazing, thank you Yonah for sharing your expertise and captsam for connecting us! I really appreciate it.

Brendan

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Yonah has exciting ideas. What is the size cut off to make this cost segregation worthwhile? I always thought my little 20 space park was too small for a CS study, but the comment on accelerated depreciation on a unit caught my attention.

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It never hurts to look into. We provide a free feasibility analysis, you can see for yourself. It has less to do with unit count and more to do with the depreciable basis (purchase price minus land allocation).

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