I have not really found too many tricks with depreciation on Mobile home parks. Here are the basics.
In most parks you have the following types of assets to consider for depreciation:
Land
Land Improvements
Mobile Homes
Tools & Equipment
Other buildings such as clubhouses or single family homes
When you buy a mobile home park you will need to allocate the purchase price to each of these items and then depreciate them over the appropriate time frame that the IRS allows. This is where most of the subjectivity comes in. On most of the parks that I have purchased, I will allocate 25-30% of the purchase price to the Land. This is the amount that you cannot depreciate.
The balance of the purchase price I will allocate to the Land Improvements and other items. If the park does not have any park owned homes or ancillary structures I will typically allocate the rest of the price to Land Improvements. These land improvements will include everything from the water, sewer, electric, and gas lines to roads, sidewalks, fences, and shrubs. The land improvement asset class is depreciated over a period of 15 years. The more you can reasonably allocate to land improvements the higher your depreciation will be in the first 15 years. As compared to buying an apartment building or single family homes that must be depreciated over 27.5 years, this gives you a higher deduction up front. Another positive factor of owning mobile home parks.
Mobile homes should be depreciated over the 27.5 year time frame in most cases. Clubhouses and other buildings are depreciated over 27.5 to 31.5 years.
For other equipment such as mowers, computers, vehicles, you can check the class lifes in the schedule. They are 3-7 years.
I have heard that some people depreciate the water, gas, & electric lines over 20 years and I am not 100% sure on this. I have always used the 15 year plan. I was audited one year and the IRS did not question this position. These are just my opinions and your accountant can advise you further.
Are there other methods to determine the value of the land improvements? Iâm looking at a small park, only park owned structure is a gazebo, gravel roads, fence and typical MH hook-ups. Asking price is $220k, land at 30% Iâd have $154k in improvements. That just seems high to me.
I was first thinking since the city has a tax value of $108k that the improvements could be everything above that, so $220-$108=92K, which seems more reasonable to me.
Another way to triangulate in on what portion of your purchase price is for the non-depreciable land vs. improvements is simply to find out what unimproved raw land costs in your area.
As an example, if such unimproved raw land costs $5,000 per acre around your MHP (be sure to use reasonable comparables - by location, size, highway access, flat vs. rolling hills, etc.), and your MHP contains 8 acres, then your non-depreciable land is worth $40,000, and by definition everything else you pay for the MHP is for depreciable improvements of one sort or another. It is then up to you and your accountant to ascribe all excess value to roads, pipes, fences, shrubs, POHs, buildings, etc.
As a general rule, the land value is 20% - 35% of the total purchase price of a MHP; everything else is depreciable.
Keep in mind that the government will tax you based on the higher, improved value of the land. But it is perfectly legitimate to depreciate the improvements; the result eventually will be a fully-depreciated MHP asset on your books valued at far less than the value at which it is being taxed.
Of course one should always argue for a lower assessed value for the improved land than your overall purchase price for the MHP because your purchase price (probably) includes paying for a âbusiness,â POHs, tools, and other items that are not improvements to the land. But protesting property taxes is a completely separate topic⊠; )
Just keep in mind that depreciation is eventually recaptured when you sell, so you are only deferring taxes not necessarily avoiding them. It may be hard to predict but it could turn out that it is better to take less depreciation now so that the taxes on your recapture are less down the road when you sell. So it may not always be best to take an aggressive position with allocating improvements.
I am not a tax expert - just my opinion. Always consult with your accountant.
it is better to take less depreciation now so that
the taxes on your recapture are less down the road
when you sell. So it may not always be best to
take an aggressive position with allocating
improvements.
I am not a tax expert - just my opinion. Always
consult with your accountant.
Bret
However one may 1031 your basis into a new property and never pay taxes. Additionally, given the time value of money, one would almost always be better off maximizing depreciation now and paying less taxes today and paying them back in the future at a non-1031 sale.
So, if we are going to maximize depreciation would a sound strategy be to hold for up to 15 years and then do a 1031? Since you lose anymore depreciation after 15 years, may as well trade up?
I agree with Jefferson. Maximize depreciation today, then plan on a 1031 in the future to defer paying depreciation recapture indefinitely. Totally depends on what your investing goals are though.
My routine is to get a copy of the sellerâs Schedule E of their tax return during due diligence and then forward that to my tax advisor. I then ask my tax advisor the question, âwhat is the maximum depreciation schedule that I can get from this property?â You will be charged a few hundred dollars for him or her to answer that question, but it is well worth it.
My understanding is that it really depends on what the current owner is doing with the propertyâs depreciation schedule.
Being aggressive on depreciation has huge benefits, but also has a disadvantage⊠Once you use it, itâs gone! You need to either sell via 1031 exchange or pay taxes on your gains until the cows come home!
A 1031 means I would have to sell (well, basically trade) a park in 15 years, right? Even then, these are deferred too I hear, and eventually run out when you quit owning property.
If you think taxes are going to be higher in the future (usually true), then why take depreciation at all, since it is generally safe to assume that taxes are higher in the long runâwell, I guess if you reinvest profits that would be a reason to get taxed now, but otherwise?.
If someone just paid say $1.5M for a property, and both comparables, and tax assessors, show the land is valued at say, $30k/acre, and its only 3 acres, thats 90k, which is far less than the 1/3 that most cite here. What am I missing?