I am currently experiencing an IRS audit. The IRS agent appears to feel that the allocation of the land value of my mobile home park should be around 70 percent of the purchase price and the improvements should be valued at about 30 percent of the purchase price. It has been my understanding based on previous posts to this forum that it is typically the other way around. Can anyone give me any kind of case law or past rulings that would indicate that the land is typically worth 30 percent and the improvements are worth 70 percent of the purchase price?
I can’t cite case law, but you are absolutely correct that for most MHPs, only around 30% of the acquisition value is ascribed to the land. I know some folks that have found the FMV for their land was just 20% of the acquisition price. The fair and correct way to do this is to look at what comparable unimproved land is worth near your community. A real estate broker will often pull this information for you for free.
This may well show that at the time you acquired your property, raw land was worth $5,000/acre. If you paid $20,000/acre for the MHP, then only 25% of your acquisition price was for non-depreciable land. The rest of the purchase price would be itemized and depreciated accordingly (park-owned homes, kitchen appliances in the park-owned homes, fences, roads, water pipes, sewer pipes, electrical boxes, gas lines, well houses, club houses, law mowers, misc. tools, office equipment, etc.) I have never heard of a MHP deal where the land was 70% of the purchase price.
Best of luck, and please give us an update once you resolve this with the IRS,
I agree with Jefferson.
You might contact an insurance adjuster – they may have the professional expertise to give you documentation of what the depreciated improvements were worth at the time of purchase. A broker can may be able to give you the land value.
In reality, these probably add up to much less than you paid. (You are buying the business for its income generating capability, not as a collection of assets). Technically, the excess that you paid should be allocated to “goodwill”, which is a depreciable asset. In practice, I believe it’s depreciated on a 15-year schedule just like pads, pedastals, water & sewer pipes, and other real property improvements, so most people probably just allocate the non-land portion of the acquisition price to those tangible improvements and call it quits.
But in any case, the non-depreciable “land” portion of your purchase should a small portion of the purchase price.
My larger point is that there is a “fair market value” for the land and for the depreciated improvements (fences, signage, sewer pipes, etc). This is a fact for which you can collect evidence that is more precise than a simple percentage of purchase price. You may need to hire an appraiser or at least get some documents from a broker and/or contractor to show proof.
The best discussion I have read of the issues involved in this is in John T. Reed’s “Aggressive Tax Avoidance for Real Estate Investors”, which can be had at http://johntreed.com/ATA.htm
That sounds way off to me. 70% land allocation is more than I’ve ever heard of unless your property is on some prime oceanfront real estate in Hawaii.
Also, have your tax advisor speak with the IRS agent. Normally, your tax advisor will make the agent look like an idiot and they will just back off.