I would greatly appreciate if someone could let me know the correct # of MACRS depreciation years that a manufactured home not anchored to land (e.g. sitting on leased land). Specific links or references to IRS publications would be ideal. Thanks in advance!
27.5 years as it is a residential dwelling per IRS regulations. I don’t have the citation but I think I had posted it at one time, try searching for that…or I’ll update when I get that search redone.
Brandon@Sandell
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On one of the MHP podcasts (Jefferson’s I believe) he mentioned breaking the mobile home into components and depreciating them individually. For example, the shell would be depreciated at 27.5 years, flooring at 5 years, etc.
To me this seems like a lot of work but might be worthwhile if there are a lot of POH in the deal.
I’m purchasing a park with 45 POH and thinking about breaking it out like this …
shell: 30% of home value
flooring: 10%
appliances: 10%
etc
I haven’t spoken with my CPA yet, but as long as there is a reasonable basis for doing this I suspect it would be ok.
Turbotax does this for you. I think the flooring, appliances etc… Would be more relevant if you add these items after the fact. Ie. Rehab
If you add appliances you would depreciate this over a shorter time like 5 years plus a bonus depreication.
Ex. Flooring would depend on how it is installed. Is it permanent or can it be easily removed.
Once you set it up in the tax software they calculate it every year for you.
Johnny,
This is a pretty standard procedure when buying property; shifting the breakdown of the purchase price to items that deprecate the quickest. For example you want the value of the land to be as low as you can possibly justify and the land improvements to be as high as you think you can get away with.
I strongly recommend that you read John T. Reed’s Aggressive Tax Avoidance for Real Estate Investors. He goes into these type of gray areas of the tax law in great detail and makes a compelling case that your interests and a CPA’s interests are often at odds. Don’t think from that, that Reed is some kind of far out guy with crazy ideas about the IRS. Though the book is easy to read (I found it hard to put down), it is filled with Harvard Business School (Reed has a MBA from there) level analysis of the IRS code and case law.
Brian is right about Turbotax. It makes doing your taxes and keep track depreciation so easy.
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Thanks for the book recommendation Randy! Looks like a good one.
Another good topic is using a CPA in this niche versus DIY (or after you get in the tax code weeds and learn it all yourself.)
Joel
(Note that the book referenced is not available on amazon as it is out of print other than authors website.)
(1) I would trust TurboTax, myself, if the data were entered properly to begin with, and the data were simple. But, at my old law firm I was sternly advised, and I think this is EXCELLENT advice, you cannot let the program do it for you, you have to do it in Excel spreadsheet. And if you ever switch away from Turbotax, or your data gets corrupted somehow, or can’t be imported from last year (we’ve all been there!) then you have a big problem reconstructing the prior years to know what happened re depreciation.
For another thing, Garbage in Garbage out. You might not be able to enter the correct things or enter them correctly. Time and again I found this was a problem. I know I wanted 10-year amortization but program won’t let me.
Or Turbotax convinces you to use the wrong MACRS life for your asset.
(2) I agree with Randy that the CPA does NOT have YOUR interest at heart. They have a CYA interest. You should be able to explain and defend what you do and what numbers appear on your returns.
(3) Worrying about separating out the floor (27.5 year property) and the roof (27.5 year property) from the shell (27.5 year property) from the deck (?) to the skirting to the etc etc etc on a used home that you buy for under $40k is a waste of time. It’s one thing to do it for a park where the numbers are large and your’re in the long term hold (presumably). Most of the park can be depreciated at 15-years, which is very advantageous compared to residential (27.5) or commercial property (39).
The difference between 5-year property and 27.5 year property is you get 20% per year on the first and less than 4% on the latter. But used appliances that are used 5-year property are not going to be very valuable, come on. Most of what you pay for is the “house.” And aren’t you going to sell this house within a year or two, anyway? You’re frontloading some expense but it’s relatively small and for a relatively short period of time. A realistic segregation of a $40k home would be maybe $2k for everything other. It just doesn’t make sense to worry about this fine-grain separation of assets you buy used for such small numbers.
A new home, well, you actually have the invoice so you can do it right. Put it down for 27.5 years, and a new appliance okay whatever that is (5-year?) and you can break it out per what you actually paid for the appliance, per invoice. This is a little more respectable than fudging the numbers on a used home that came as a unified whole. In this case it’s no extra work to do it accurately and you have backup for your allocations.
But worrying about pulling out the non-27.5 year property from the home is going too far for too little benefit, in my opinion. It is also most likely indefensible at audit if you purchased the home as a single item. And most of the property you would segregate (roof, furnace, flooring) is all 27.5 property anyway.
See IRS publication 946.
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Reed is waiting for the coming changes to the tax law before issuing the new addition of his tax book.
Brandon’s post is eminently sensible; it is quite possible to loose touch with practical reality on the quest for the lowest legal tax bill, but I would point out that Turbo Tax does print out depreciation worksheets that are very easy to understand.
Thanks all - I’m going to get a copy of that book for some light reading…
Back up your important data in more than one place. Your computer which seems programmed to break down after around 2 years of use is not one of the places. Sorry to say been there done that already!!
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Thank you all for your helpful responses to my initial post. Very much appreciated!