Articles Coming to Arvee:
1. How To Depreciate A Mobile Home Park by Robert Salazar, CPA
2. What is a Section 179 Deduction
3. Residential Real Property v. Non Residential Real Property
4. What is Cost Segregation and how it applies to a Mobile Home Park
5. How to prepare a Park Financial Statement for your Banker
How to Depreciate a Mobile Home Park
If you have just purchased a park, you will need to complete an analysis of the assets (tangible & intangible) and assign a value to each (purchase price allocation) for tax purposes. This value will be the starting point for your depreciation. Depreciation is a yearly tax deduction for the purchase of certain property used in your business. It is an allowance for the property that will deteriorate, lose value and wear down over time. Not all purchases should, or can, be depreciated. Land, for example, is never depreciated. Assets you purchase for the business that have a life of less than one year can be expensed in that year.
A mobile home park purchase may generally consist of land, buildings, mobile home units, tools, equipment, sheds, landing pads (cemented, gravel or dirt), and the related infrastructure (landscaping, sewer pipes, gas pipes, electrical, paved roads, sidewalks, fencing, signs, fences, gravel or rock throughways, etc.). All of the above assets should be assigned a value at the onset so that you can establish a basis for depreciation.
You will be able to depreciate most types of assets owned and used in your park such as:
Mobile Home Units
Land Improvement Cost
Land cannot be depreciated, so we will take this out of the equation. You will need to allocate a value to the land. Generally, when allocating the purchase price to assets, land will be allocated a value between 25%-30% of the purchase. You may look at the property tax assessor’s values to compute a ratio of value of land to assets. Although land cannot be depreciated, you will be able to depreciate certain cost for business use such as; landscaping, through-ways preparation, site/landing pad improvements, septic systems improvements, etc.
Depreciation begins when you place the property into service and when it is ready & available for the specific use. Depreciation stops when the property’s cost or basis is fully recovered or when it is retired from service (whichever happens first). Mobile homes should be depreciated over a 27.5 year time frame. If the mobile home units you purchase with the park are in very bad condition and will not last over the 27.5 year time frame, you may have a position to depreciate over the actual remaining life of the unit. I recommend you discuss with your tax advisor.
Other equipment will have class lives for depreciation between:
Depreciation - Class Lives / MACRS Recovery Periods GDS & ADS
Autos GDS 5 ADS 5
Computers GDS 5 ADS 5
Calculators/Copiers GDS 5 ADS 6
Office Furniture GDS 7 ADS 10
Land Improvements GDS 15 ADS 20/25
Residential Real GDS 27.5 ADS 40
Non Residential RealGDS 27.5 ADS 40
When you purchase a new park, I recommend that you complete an assessment of the assets of the park. Not only the obvious assets listed and disclosed in the seller’s disclosure, but a comprehensive analysis of assets that have value and may not be obvious that can be depreciated as discussed above. Be sure to assign a value to all of these assets. This is the staring point for your “basis” and supporting this deduction that is often under reported. It is imperative that you discuss with a professional to assist you in determining the FMV, basis and allocation of value to each of the assets purchased.
Next article: How can park owners benefit from Section 179?
Robert Salazar, CPA