We are under contract to purchase an 80 acre (16 lots) MHP for $1.6M. As the contract currently reads we are just buying the land and not necessary a business. Similar, unimproved land in the area might sell for $800k (10k/acre). The entitlements (legal, non-conforming) of the land are worth a lot.
We are concerned about getting enough depreciation that we won’t need to pay income taxes on approximately $60k / year. If we could assume goodwill of $500k or do a cost segregation study to make sure most of the purchase isn’t considered non-depreciable land it would go a long way.
Our account said that unless we are purchasing a business goodwill isn’t a thing. And if our hold period is 7ish years then the cost segregation study doesn’t always make sense. We aren’t considered real estate professionals and just carry forward passive losses year to year.
Any tips on the allocation of purchase price or anything else that would help for taxes? The owner appears to have an operating LLC that we could purchase with the land. We won’t close until next year but any tips for additional depreciation would be great.
If you are buying a mobile home park that contains homes and tenants who pay rent, then you are buying a business regardless of what the contract calls it. You are buying roads, pads, mailboxes, landscaping. Also, if you are buying homes, you would be getting things like carpets and appliances that depreciate quickly. I would guess that you are also buying intellectual capital including trade names, phone numbers, websites, social media accounts, etc. If your contract does not call these things out, you may want to modify your contract.
Unfortunately, I cannot offer any better guidance than a CPA or cost segregation professional would, but it seems clear to me that you are buying much more than land.
mPark - I agree that we are buying a business. Does the tax code allow me to just allocate $500k to goodwill as part of the purchase? Or do I specifically need to purchase an entity with an EIN to have goodwill?
SDGuy - If we do want to allocate to the other improvements do we need professional guidance or is there rules of thumb to follow for individual septics and meter poles?
I think you could reasonably allocate the FMV purchase price reasonably among land value, 15-year improvements, and “other”.
As long as the land value is reasonably accurate, and buildings/structures comprise their reasonable portion of the basis, ( and these can be probably be ballparked with simple comps,) I think it would be hard for the IRS to say No you did it Wrong and besides, what benefit to the IRS could there be?
If you try to depreciate 39-year property (clubhouse, e.g.) as 15-year property, that’s going to raise a flag.
But assuming you’ve called out a reasonable basis for your land and your buildings, the remainder mostly is 15-year property no matter which way you slice it, and the part that isn’t, is so small relative to the rest that I don’t think anyone would question it.
Example : $3 million purchase price
$440k land value on a per acre comp
$360k value building one (insurable value)
$500k value building two (Insurable value)
Leaves $1.7mm to allocate
Just arbitrarily divide:
$500k roads
$500k sewer
$300k water
$300k electrical
$100k whatever you get the idea
I am not a CPA and cannot give you specific advice on the tax code. In terms of having a professional to do your cost segregation, I don’t think that is necessary. You can come up with your own reasonable assumptions. The test would be if the assumptions are not reasonable than the IRS could question them.
This was a very helpful comment. I’m curious, do you use a cost seg company or do you just work with your CPA to put this together? If the the first, would you be willing to recommend who you use to me? I’m looking to do three properties this next year.
We’ve used Madison SPECS on multiple properties. It’s worth getting the free estimate just to educate yourself on the process, what options you have on your current deal, as well as future deals. And of course, work with your CPA to interpret and strategize, based on your unique situation, and what you’re trying to ultimately accomplish…think of this as another arrow in your investment quiver.