Cost segregation Study?

Hi All,

I purchased 2 parks in Cocoa FL. last year (2012) and have a question… well, actually my accountant has a question.

I am working with a new accountant and he mentioned that I should look into having a Cost Segregation Study done on my parks because I could save lots of money. He’s not sure how to go about depreciating the land/mobile home for tax purposes and to be honest…I have no clue.

Any helps would be greatly appreciated.

Thank you

It is generally accepted that mobile homes are depreciated over 27.5 years. That said, I have had CPAs tell me that used mobile homes can be depreciated over 5 years. Ask your accountant. Regardless, remember that improvements to a mobile home (carpet, paint, appliances, etc.) can generally be depreciated over 5 years.

The mobile home park itself can be depreciated on an accelerated basis if you segregate the improvements. We depreciate our roads, signage, water pipes, sewer pipes, well house, etc. over varying accelerated schedules. I believe the signs and fences can be depreciated over roughly 5 years, I believe the roads are 20 year property, etc., etc. Ask your accountant.

-jl-

I teach there are 3 parts to every property- and each is handled in its own way.

Land, improvements (buildings), items that service (water lines, sidewalks, fences), personal

Land- is just that- the dirt- needs a value but can not be depreciated

Improvements- Club House, Well House, Sewer Plant, Rental Houses, Mobile Homes, Sheds - 27.5 years

Items that service- Fences, roads, water lines, electric - 15 years

Personal Property- carpet, drapes, appliances, furniture- 5 years

I will tell you we advise people to write these separated values into an addendum to your purchase contract. The IRS will have fewer issues with your values if they were negotiated up front. Be REAL with your land value.

Here is another thing- Much of the value of your MHP is NOT these items- it is the capitalized income. So… if you were going to contest your taxes- you might think about breaking the purchase into a 5th value- the business value. Because taxes are based on the land value- not the business value- this can give you teeth with the assessor that tries to value your purchase as a real property purchase- where it is really a blended purchase of real property, improvements, personal property and a business…

Food for thought…

Jim

When you buy a park that has park owned homes included in the sale, I know you need 2 entities, ie one for the park & one for the mobiles, but do you also need separate purchase agreements, or everything just gets thrown into one.

Good question. So when you buy the property in the regular purchase and sale agreement you just use a price. In an addendum, we place values on all of the asset classes. Then- after the sale- we have our separate LLC used to sell the homes purchase the homes from the primary LLC. This allows you to set values in the new llc, and show the assets moving away from the primary llc. If the numbers you used in the sales contract, and the number you used to buy the homes match- you have done well. This also allows you to use ‘other people money’ in separate llcs to buy the homes that are going to be sold (self directed IRA’s etc).

It is very clean to do it after the sale.

For the record- you do need a ‘bill of sale’ signed at closing for all personal property, this would include mobile homes, mowers, computers etc…

williamt Wrote:


Jim

When you buy a park that has park owned homes

included in the sale, I know you need 2 entities,

ie one for the park & one for the mobiles, but do

you also need separate purchase agreements, or

everything just gets thrown into one.

Jim -

Why would you not just have the second LLC purchase the mobile homes directly at closing?

Thank you,

-jl-

Thank you all for the insightful information. It has helped me tremendously. I did find a company specializing in Cost Segregation Studies, and luckily they are local to Brevard County. I also wasn’t aware of having separate LLC. to place the park owned homes under, so that information was an added bonus.

Much appreciated.

While business personal property gives the fastest rate of depreciation, won’t it also generate a business personal property tax that somewhat offsets that advantage. IE at what point is it more beneficial to allocate more to a 15-year depreciation category like goodwill or roads/ sewer lines etc.

First- This is just my way, not the only way, or the right way…

Most of the time the mobile homes are included in the contract and the overall sales price. So in fact, to a certain extent they determine the financing etc.

For instance- If I bought a 100 space park- and it had 80 homes come with it, and I paid $500,000 for the park… lets just be silly and value each of the homes at- $3,000.

Now if everything were on up front with the bank and the contract it would say-

MHP LLC is buying MHP

HOMES LLC is buying Homes

now that is 240,000 for the homes- and 260,000 for the park

But I am buying them together, as one package. If I split off the homes and the land in the contract, and at the closing, the bank is then really only loaning on the MHP- the 260,000 part.

If I put myself in the banks shoes- I would wonder why I was loaning on $500,000 when about 1/2 was going to be transferred to this other LLC…

I think this is VERY important if you’re using other peoples money for the homes llc, or a self directed IRA. The chain of money and the paydown of the debt will leave no doubt when you’re undergoing an IRS audit that you are not money laundering.

So- to keep the accounting clean- we show the homes as an asset- and then we sell them off for pre determined market value. I recommend you pay down your loan with the money that comes in from the sales. Banks require borrowers that subdivide or sell off parts of assets that are mortgaged to pay down a set portion of the debt with each sale. I think if the bank knew you were doing this- they would require in the note for this to happen.

for the record- the above mentioned deal is real- the numbers were adjusted up by 25% to keep the example clean- but I own this park.

Now for the song and dance- I am NOT a CPA, I am NOT an attorney…

Everyone needs to have their entire purchase contract and process reviewed by their own CPA and attorney and adjust the purchase and operations to match your own advice.

off topic - rant- sorry

Also- do NOT use a bookkeeper or someone that does tax prep, Find a good CPA, a really good CPA, a ROCKSTAR CPA- one that defends IRS audits, one that understands leasing and installment sale finance and repossession, and imputed interest. If you are selling on a lease option, and you do not understand installment sales and imputed interest- you need a CPA.

rant over…

Hello,

Your question came up on a google alert today and I thought I would toss in a comment. There are cost segregation experts in all fields and industries, you might be very sure you find one that really knows your industry. Someone doing offices or restauarnts most of the time might not be much help to your situation.

If you don’t find one,maybe we can help. I’d like to post your question in our linked in forum and see what the responce is.

best of luck,

Edward Walsh

Executive Director

American Society of Cost Segregation Professionals

www.ascsp.org

Cost segregation is more than a thought.

First of all, I agree with Jim (and Jefferson) – ask your CPA who should be a rock star and know something about mobile home parks, assuming you can find one.But this might help to set a basis for discussion with your CPA:() Bank will typically grant a mortgage loan which must be backed by real estate collateral – no homes.  Maybe an “office” or “clubhouse” or “storage” might be included in the collateral (buildings permanently attached to the land are considered real estate), but not the mobile home personal residences.() Appraisal of “park only” real estate will typically satisfy bank that your park collateral is sufficient.  This sets your “park” portion of the total purchase price, approximately.() If the bank is lending on homes collateral also, make sure you and the bank understand when and how the homes collateral can be released (in case of your selling the home, or selling all the homes in a package deal down the road when you sell the park).  This has been a problem for us when looking at parks to purchase – if the homes and park are wrapped up in the same loan, the park is not an attractive purchase because our business model depends on being able to separate and sell the homes without dealing with the mortgage bank all the time.() The seller is (probably) not going to care about how you allocate the purchase price, so do it in a way that makes the bank happy.  Probably the best way to do this is to allocate as much value to the park as the bank will permit (so you get as big a mortgage loan as possible) and as little to the homes as possible.  The bank and bank’s appraiser will have some thoughts on this, naturally.() Once you have the “park” purchase price, the leftover is the “homes” purchase price.  I believe there is ample case law requiring the 27.5 year depreciation schedule for mobile homes used as residences.  If there is an “office,” or “laundry” or “pump house,” &c, you might be able to get a shorter depreciation schedule (check with your CPA).  Mobile home improvements (carpet, appliances, etc) are depreciable on shorter timelines (e.g. 5 years), but segregating all this out is a headache both from the beginning and every tax year when your CPA prepares the returns.  Might just be easier to do 27.5 years on the per-home price and forget the details.  For example, we once bought homes with a park and allocated $500 to each home.  Not worth it to subdivide or segregate more finely.() For the “park”, you are paying for the land and the improvements.  Land is non-depreciable, so you want to allocate as little of the purchase price to the land as possible, but still within reason.  Professional cost segregation can help here.() For the park improvements, you have roads, pipes, electrical cables & pedestals, fences, signs, &c.  A lot of that is 15-year property.  (Professional can tell you what’s worth what.  Or maybe guesstimate?)  You probably will have the majority of your purchase price allocated to these kinds of improvements.() You may have some miscellaneous items you can depreciate faster, i.e. 5 years for office equipment & furniture, etc.  But the value of this business personal property is going to be de minimis compared to the rest, and I would think it’s not worthwhile to segregate it and depreciate it separately.  Personally, I would assign $0 value and leave this kind of stuff off the tax depreciation schedule.() Business personal property is taxed by the county in my jurisdiction, so I make up a reasonable sounding number and just pay the county taxes based on that number but that amount of business personal property is not on my federal tax return as a (5-year?) depreciable item – I ignored it, see previous point.---------------------With respect to separating the “homes” LLC from the “park” LLC, there have been previous threads on this topic wherein I left my 2 cents worth, but here it is again (it’s only 2 cents):I would do something similar to Jim Johnson’s method where the main park LLC executes the contract with the seller and then turns around (with the bank’s okay) and sells the chattel (personal property, i.e. homes) to the homes LLC.Keep the park-related (dirt-related) expenses on the park LLC’s books, and the homes-related expenses on the homes LLC’s books.  (You’re keeping separate books, right?)  Since homes run at a higher expense ratio than parks, this will help keep the park expenses down and keep your market value up. In my opinion, the homes LLC is worth what the homes are worth (sold on the market), regardless of the expense or income they generate.  You can try to find someone who will value the homes LLC based on a capped income, but we don’t value them that way.  In case it wasn’t clear, I mean if the homes LLC generates $10k per year net income, you might be able to find someone who will pay you $80k for that LLC (at a 12.5% cap rate), but I would pay a wholesale price based on the number and condition of the homes and how much I could sell them for individually at retail, i.e. a per-home price.Brandon@Sandell

Going through this issue with my accountant as we speak.Is there a general rule of thumb that is applied to percentage of land versus improvements?  For example, 30% of the purchase price to land and 70% to infrastructure?  

The way to value your land vs. improvements is to get a few comps of raw land that have sold in your area.  To be accurate and defendable comps, they should be similarly sized parcels of land, on similarly trafficked streets, and as flat or hilly as your land, etc.  We recently purchased a park where the raw land comps documented that the land value for our MHP was $6,000/acre.  Well, we had paid $30,000/acre.  So we then allocated the remaining $24,000/acre to improvements (roads, water pipes, sewer pipes, septic fields, paved roads, etc.) and some to Goodwill.  The depreciation schedule of the improvements averaged about 15 years; and Goodwill is amortized over exactly 15 years.  So it does not much matter to which you allocate the excess.  The important part is to get your non-depreciable land value correct; the rest will come off your balance sheet one way or the other over about 15 years and flow through your P&L as Depreciation or Amortization and thus reduce your taxes by creating a phantom 'loss.'In this deal our non-depreciable land was about ($6k/$30k=) 20% of our purchase price.  80% is being depreciated or amortized.  Our deals have ranged from 65% - 80% depreciable/amortizable.   This excludes the value of any POHs, which must be done separately (27.5 year property), and we typically buy in a separate LLC.Good luck,-jl-

Some good comments here. I’m dealing with this issue myself currently and weighing options, particularly with respect to using goodwill for part of the value.

From what I’ve learned, and please correct me or clarify if I’m missing something here, it comes down to this.

If you want to use goodwill, this forces you onto Schedule C (for a business) of your tax returns rather than just listing the MHP as another property on Schedule E as my CPA tells me that straight RE does not have a goodwill component. This means that self-employment tax rears its head, albeit not too much in the beginning because most income is wiped out by depreciation/amortization. But presuming you raise rents over time and start running out of depreciation/amortization, the 15.3% self-employment tax on top of state and federal can really start eating into your profits. For myself, I’m looking at about $5,000/year if I go the sched C route and this is only my first return for the park. I think the advantage of using Goodwill is you’ve now got 3 things to segregate across (land, improvements, goodwill) so it might be easier to justify low land value.

If you go schedule E, which you can provided your park doesn’t provide substantial services (see this link : http://www.irs.gov/Individuals/Tax-Trails---Self-Employment-Income-6 ) then the self-employment tax will never rear it’s head. It might however be harder to push the land value down as far as you want it since you don’t have goodwill to allocate some of the price to.

If anyone has ever successfully done one of the following, please reply with details:

  1. put the MHP on sched E but used Goodwill
  2. put the MHP on sched C but not had self-employment tax come up

Regards,

HPD

You are holding title to the MHP in a separate company, right? Why don’t you have that company file its own tax return?

Brandon@Sandell

Our CPA says all real estate always goes on Schedule E. He also reminds us that Goodwill is a Balance Sheet item, and as such, is not reported on either your 1040 or your K-1 (if you own your MHP in a partnership). The reduced NOI (due to Goodwill amortization), of course, goes on your Schedule E (or on your K-1, and then reported on your Schedule E).

Our typical deal is:

  • 15% non-depreciable land
  • 70% improvements (allocated to roads, pipes, clubhouses, fences, signage, etc. - ~17.5 year life)
  • 15% goodwill (15 year life)

Your mileage may vary,

-Jefferson-

1 Like

I sent you a PM. Looking forward to hearing back

Hi Jefferson,

Please clarify, are you saying that you do in fact put Goodwill onto your schedule E? Is it directly listed as that?

Thanks,

HPD

No goodwill shows up on my Schedule E. Goodwill is capitalized onto the Balance Sheet. Only P&L line items show up on Schedule E. Goodwill is 15 year ‘property’ so we write-off 6.6% of it every year. That, of course, reduces our NOI. And our reduced NOI is indeed reported on Schedule E. But not the Goodwill amount that sits on the Balance Sheet. The Goodwill that expense every year through the P&L does not even have it’s own line item on Schedule E. I believe it is included on the ‘Other’ line item.

I’m not a CPA, but I do play one on TV. :stuck_out_tongue_winking_eye: Consult with your CPA.

Hope this helps,

-jl-