Tax Advantages of MHP

[Margaret Curtis]

Hi all - Have researched but can't find the answer, so hoping someone here will be able to answer:   Do MHP have any or all of the same tax-advantages as other residential real estate? 

I know you can write off expenses against income, as with other REI, but do MHP depreciate for tax purposes? Land doesn't depreciate, and the homes themselves (if POH) are personal property, not real property, correct? So the homes wouldn't depreciate. Thanks in advance for any help!

[Jack Martin]

@Margaret Curtis mobile home parks tend to be more tax efficient than most other real estate. The primary reason for this is due to the fact that a large portion of a mobile home park’s value gets allocated to land improvements, allowing more of the property’s value to be depreciated at an accelerated rate. 

Land improvements are things like roads, underground pipes, electrical lines, pads, and pedestals, which have a shorter useful life and are depreciated at a faster pace, generally over a period of 15 years if you choose straight line depreciation.

However, the benefits of depreciation became even more attractive when the Tax Cuts and Jobs Act of 2017 increased first-year bonus depreciation to 100%. Applied to a mobile home park, this means the land improvements can be expensed 100% in the first year of ownership, instead of over a 15-year period.

This can be immensely attractive for investors seeking tax losses to offset passive investment gains they have received in that same calendar year. The use of bonus depreciation can be an alternative strategy for investors who are not able to successfully execute a 1031 exchange, for example. T

Depreciation and bonus depreciation defer taxes until the property is sold. In other words, investors pay less tax on the income while they’re invested and are able to offset passive investment income from other sources. 

Investors in higher tax brackets will realize a lower tax rate when the property is sold than they would have if depreciation was not utilized. This “tax arbitrage” strategy lowers their overall tax bill and is an additional benefit beyond the time value of money.

In summary, the accelerated depreciation afforded to mobile home parks makes them one of the most tax-efficient real estate investments. With bonus depreciation, investors get to enjoy “tax-free” income from a predictable strategy while they are invested, and offset qualified passive income from other sources.

Mobile home parks are already known for their recession resistance and ability to deliver consistent cash flow, but their tax efficiency is yet another reason they are one of the most attractive investments in real estate.

All the best, 

Jack