All Forum Posts by: Jack Martin

@Will Mejia if you reinvest prior to the end of the calendar year into the right type of property where bonus depreciation is taken, you may be able to reduce your tax exposure partially or completely. 

Bonus depreciation can be a powerful tool if approached correctly, and has the potential to create substantial tax benefit, which can be used to offset the gains incurred from the sale of your rental properties.

As you seek investments with bonus depreciation, keep in mind some property types will garner more benefit than others. Bonus depreciation is derived from the portion of the property's value with a shorter useful life than the buildings themselves. Therefore the property types that are the most favorable to generate bonus depreciation will be those with a high degree of what the tax code refers to as "land improvements". 

Examples are mobile home parks, RV parks, and golf courses where the value of the property is not primarily derived from building(s) but rather from the improvements to the land. In a mobile home park, most of the value is in the underground infrastructure, roads, landscaping, amenities, pools, fencing, pads, utility pedestals, etc, while only a small portion of the value comes from a building, like a clubhouse or laundry facility. In a similar fashion, if you can imagine how much landscaping and underground infrastructure is in a golf course as compared to the clubhouse, that will give an indication of why an extremely high percentage of the property's value is allocated to the land improvements. 

Properly executed, an investment in these types of property can garner substantial passive losses, often equal to the amount of capital invested (or more) even in years where the benefit begins to sunset.

A few words of caution:

- The tax benefit is valid as long as the gain incurred from the sale of your properties AND the investment with bonus depreciation occur in the same calendar year.

- Be careful not to let the "tax tail" wag the dog. Avoid investing in a poor property or poor location, simply for the depreciation benefit.

- If you are investing passively in a syndication with bonus depreciation, make sure to vet the sponsor and understand the investment vehicle before you invest. Bonus depreciation is an incredible tax benefit, but when you take the time to combine it with the right property and sponsor, that will prove to be a wining formula.

Disclaimer: I am not a tax advisor or CPA. This perspective is solely from years of experience managing mobile home park funds and working with the tax experts around us.

All the best,

Jack

Yes, technically you are correct. It is carried forward as PAL, but if you don't use it over the life of the investment, it would be used to offset section 1250 recapture at the time of sale. Only the profit earned from the sale would be taxed as capital gains, which for most people is 20%. 

For those who use their PAL along the way to offset rental income (for example) they would benefit more since rental income is taxed as ordinary income. In that example, they would be exposed to section 1250 recapture at a flat rate of 25%. Assuming their marginal tax rate is higher than that, they gain tax arbitrage, plus the time value of money. 

@Jennifer Taylor keep in mind, some properties will garner significantly more tax benefit than others. Bonus depreciation is derived from the portion of the property's value with a shorter useful life than the buildings themselves. Therefore the property types that are the most favorable to generate bonus depreciation will be those with a high degree of what the tax code refers to as "land improvements". Examples are mobile home parks, RV parks, and golf courses where the value of the property is not primarily derived from building(s) but rather from the improvements to the land. In a mobile home park, most of the value is in the underground infrastructure, roads, landscaping, amenities, pools, fencing, pads, utility pedestals, etc, while only a small portion of the value comes from a building, like a clubhouse or laundry facility. In a similar fashion, if you can imagine how much landscaping and underground infrastructure is in a golf course as compared to the clubhouse, that will give an indication of why an extremely high percentage of the property's value is allocated to the land improvements. Properly executed, an investment in these types of property can garner substantial passive losses, often equal to the amount of capital invested (or more) even in years where the benefit begins to sunset. In other words, you may be able to achieve 100% (dollar-for-dollar) coverage from an investment in the right kind of property. 

A few words of caution:

- Be careful not to let the "tax tail" wag the dog. Avoid investing in a poor property or poor location, simply for the depreciation benefit.

- If you are investing passively in a syndication with bonus depreciation, make sure to vet the sponsor and understand the investment vehicle before you invest. Bonus depreciation is an incredible tax benefit, but when you take the time to combine it with the right property and sponsor, that will prove to be a wining formula.

Disclaimer: I am not a tax advisor or CPA. This perspective is solely from years of experience managing mobile home park funds and working with the tax experts around us.

All the best,

Jack

One important item to note: if you receive passive losses from bonus depreciation and do not have a use (or only a partial use) for those passive losses in that calendar year, they can be used in subsequent years to offset gains as well. In other words, they don't expire if not used in the same calendar year they were derived. 

Also, if you never use all the benefit, whatever unused portion remaining is not subject to recapture when the property is sold in the future. 

All the best,

Jack

@Matt W. You could pursue a syndication with bonus depreciation to offset the gains. As long as the gain you incur from the sale of your property AND the investment with bonus depreciation occur in the same calendar year, it's possible to defer all of the tax exposure you would otherwise have.  

If you pursue the bonus depreciation strategy, keep in mind some property types will garner more benefit than others. Bonus depreciation is derived from the portion of the property's value with a shorter useful life than the buildings themselves. Therefore the property types that are the most favorable to generate bonus depreciation will be those with a high degree of what the tax code refers to as "land improvements". Examples are mobile home parks, RV parks, and golf courses where the value of the property is not primarily derived from building(s) but rather from the improvements to the land. In a mobile home park, most of the value is in the underground infrastructure, roads, landscaping, amenities, pools, fencing, pads, utility pedestals, etc, while only a small portion of the value comes from a building, like a clubhouse or laundry facility. In a similar fashion, if you can imagine how much landscaping and underground infrastructure is in a golf course as compared to the clubhouse, that will give an indication of why an extremely high percentage of the property's value is allocated to the land improvements. Properly executed, an investment in these types of property can garner substantial passive losses, often equal to the amount of capital invested (or more) even in years where the benefit begins to sunset.

A few words of caution:

- Be careful not to let the "tax tail" wag the dog. Avoid investing in a poor property or poor location, simply for the depreciation benefit.

- If you are investing passively in a syndication with bonus depreciation, make sure to vet the sponsor and understand the investment vehicle before you invest. Bonus depreciation is an incredible tax benefit, but when you take the time to combine it with the right property and sponsor, that will prove to be a wining formula.

Disclaimer: I am not a tax advisor or CPA. This perspective is solely from years of experience managing mobile home park funds and working with the tax experts around us.

All the best,

Jack

@Stephen Bass bonus depreciation can be a powerful tool if approached correctly, and has the potential to create substantial tax benefit, which can be used to offset the gains incurred from the sale of property.

As you seek investments with bonus depreciation, keep in mind some property types will garner more benefit than others. Bonus depreciation is derived from the portion of the property's value with a shorter useful life than the buildings themselves. Therefore the property types that are the most favorable to generate bonus depreciation will be those with a high degree of what the tax code refers to as "land improvements". Examples are mobile home parks, RV parks, and golf courses where the value of the property is not primarily derived from building(s) but rather from the improvements to the land. In a mobile home park, most of the value is in the underground infrastructure, roads, landscaping, amenities, pools, fencing, pads, utility pedestals, etc, while only a small portion of the value comes from a building, like a clubhouse or laundry facility. In a similar fashion, if you can imagine how much landscaping and underground infrastructure is in a golf course as compared to the clubhouse, that will give an indication of why an extremely high percentage of the property's value is allocated to the land improvements. Properly executed, an investment in these types of property can garner substantial passive losses, often equal to the amount of capital invested (or more) even in years where the benefit begins to sunset.

A few words of caution: 

- The tax benefit is valid as long as the gain incurred from the sale of property AND the investment with bonus depreciation occur in the same calendar year. 

- Be careful not to let the "tax tail" wag the dog. Avoid investing in a poor property or poor location, simply for the depreciation benefit. 

- If you are investing passively in a syndication with bonus depreciation, make sure to vet the sponsor and understand the investment vehicle before you invest. Bonus depreciation is an incredible tax benefit, but when you take the time to combine it with the right property and sponsor, that will prove to be a wining formula.

Disclaimer: I am not a tax advisor or CPA. This perspective is solely from years of experience managing mobile home park funds and working with the tax experts around us.

All the best,

Jack

@Reid Richardson it's been awhile since we last connected, so let's jump on a call soon! We acquired up 308 spaces in Texas last year and would like to acquire more. 

Also, we are selling a 62 space park in Arizona, so if you have anyone looking for that size asset, PM me on that. 

All the best,

Jack

@Gail L boucher as @Dave Foster mentioned, there are several options available for you to sell your property, end your days of being a landlady, and avoid paying the tax. 

Some may or may not be appropriate for each case, so I would encourage you to speak with professionals who understand the implications of each strategy, along with your personal goals. 

I can speak to one such strategy, commonly referred to as "the lazy 1031". This strategy would allow you to sell your property and reinvest into a passive investment that includes bonus depreciation. As a MHP sponsor, we are actively using this strategy, so I will explain:

When a property is purchased and a formal cost segregation study is performed, the entire portion of the property's value with a useful life of 20 years or less can be taken as a passive loss in the year the property is purchased. This is known as "bonus depreciation".

This has the potential to create substantial passive losses, which are allocated to those who invested in the property. These losses show up on your K1 and can be used to offset the gains you incurred from the sale of your property, as long as the gain AND the investment with bonus depreciation occur in the same calendar year. Any passive losses you have no use for in that calendar year will carry over, so they can also be used in subsequent years.

Keep in mind, some property types will garner more bonus depreciation than others. Bonus depreciation is derived from the portion of the property's value with a shorter useful life than the buildings themselves. Therefore the property types that are the most favorable to generate bonus depreciation will be those with a high degree of what the tax code refers to as "land improvements". Examples are mobile home parks, RV parks, and golf courses where the value of the property is not primarily derived from building(s) but rather from the improvements to the land. In a mobile home park, most of the value is in the underground infrastructure, roads, landscaping, amenities, pools, fencing, pads, utility pedestals, etc, while only a small portion of the value comes from a building, like a clubhouse or laundry facility. In a similar fashion, if you can imagine how much landscaping and underground infrastructure is in a golf course as compared to the clubhouse, that will give an indication of why an extremely high percentage of the property's value is allocated to the land improvements. Properly executed, an investment in these types of property can garner substantial passive losses, often equal to the amount of capital invested, or more, even in years where the benefit begins to sunset.

A few words of caution: Be careful not to let the "tax tail" wag the dog. Avoid investing in a poor property or poor location, simply for the depreciation benefit. In that same vein, if you are investing passively in a syndication with bonus depreciation, make sure to vet the sponsor and understand the investment vehicle before you invest. Bonus depreciation is an incredible tax benefit, but when you take the time to combine it with the right property and sponsor, that will prove to be a wining formula.

Disclaimer: I am not a tax advisor or CPA. This perspective is solely from years of experience managing mobile home park funds and working with the tax experts around us. 

All the best,

Jack

@Mack Fleming your case is quite a bit different than most people seeking to develop, since you own the land and have an experienced background. The item not mentioned on this thread that will be crucial to making a decision is what will the park be worth when you are done? I recommend you network with the most experienced RV park brokers in that region to gain a clear understand of what they could sell it for, then work backwards from there to determine if the cost and energy will be worth it. You can google RV park brokers, or search for them on listing platforms like Crexi. Feel free to DM me and I can recommend a few good ones. 

All the best,

Jack

@Ryan Lowe great responses here. A little further detail on the bonus depreciation strategy, which tends to be one of a passive investor's favorite strategies:

When a property is purchased and a formal cost segregation study is performed, the value of the property is segregated into land (which is not depreciated), buildings (which are depreciated on a 39 or 27.5 year schedule), land improvements (15 year schedule), and other smaller items like personal property. When the bonus election is chosen, then the portion of the property's value with a useful life of 20 years or less can be taken as a passive loss in the year the property is purchased.

Keep in mind, some property types will produce more bonus depreciation than others. I am a MHP sponsor and we are actively using this strategy, so I will unpack this here:

Since bonus depreciation is derived from the portion of the property's value with a shorter useful life than the buildings themselves, the property types that are the most favorable to generate bonus depreciation will be those with a high degree of "land improvements". Examples are mobile home parks, RV parks, and golf courses where the value of the property is not primarily derived from building(s) but rather from the improvements to the land. In a mobile home park or RV park, most of the value is in the underground infrastructure, roads, landscaping, amenities, pools, fencing, pads, utility pedestals, etc, while only a small portion of the value comes from a building, like a clubhouse or laundry facility. In a similar fashion, if you can imagine how much landscaping and underground infrastructure is in a golf course as compared to the clubhouse, that will give an indication of why an extremely high percentage of the property's value is allocated to the land improvements. Properly executed, an investment in these types of property can garner significantly more passive losses for investors as compared to other commercial real estate.

Also keep in mind that 100% bonus depreciation started phasing out in 2023, which makes it even more important to choose real estate with the highest amount of land improvements.

If you are seeking passive investment with a sponsor, a few words of caution: make sure the sponsor is choosing the bonus election. Also, make sure they are performing a formal cost segregation study and not just "winging" it on their own. And make sure you vet the sponsor to completely understand the investment vehicle before you invest. Bonus depreciation is great, but when you combine that with an experienced sponsor and quality investment properties that produce cash flow and appreciation, that will be a winning formula.

Note: I am not a tax advisor or CPA. This perspective is solely from my own experience managing mobile home park funds and working with the experienced tax experts we are fortunate to have around us.

All the best,

Jack