Not Often Talked About MHP Tax Strategy

[Nathan H.]

Hi BP Community!

I just want to share a strategy I used on a property I closed on yesterday. Please feel free to critique/ point out anything I'm not seeing:

I sold a rental property over the summer that I had a low basis in relative to the sale price (due to a low purchase price, rather than accumulated depreciation). I decided to 1031 the proceeds. 

I closed on the replacement property yesterday: A 13 unit MHP. 7 units are park owned, 3 are tenant owned, 3 are on rent to own agreements. 

Trailers are considered personal property, land and land improvements are real property. Real property can be the replacement property in a 1031 exchange, personal can not. In reality, I paid one price for everything (trailers, land and land improvements), but for purposes of the 1031 exchange I had to separate it out, 150k for trailers and 310k for land and improvments. 

What has me pumped is that I can claim 100% bonus depreciation on the trailers and wipe out a ton of ordinary income with the tax loss. The 1031 is still legit since it was for the purchase of the land and land improvements. Also, the purchase price assigned to the land will have a carryover basis much closer to the purchase price than it would, had I exchanged into the full purchase price of the MHP, or an alternative type of real estate with a similar purchase price. AND the land improvements are 15 year property, allowing for more aggressive depreciation. I get it that a decent portion of the 310k will go to land value which isn't depreciable, but I'll have much more depreciation and much faster depreciation than I would if the replacement property was something other than a MHP. 

Let me know you thoughts. Thanks!

[Nathan H.]

@Scott Wolf

Hey Scott. I’m a tax accountant for my day job, so my tax professional gave me the thumbs up on this one! Haha