I am a real estate investor who is always looking for ways to minimize taxes. And I, like many other investors, also have employment income that affects our tax rates on our investments. So how can we minimize our taxes? By investing in mobile home parks!
Why do these communities provide better tax advantages than other forms of real estate? Rapid depreciation.
Depreciation on residential properties takes place over a period of 27.5 years, or 3.64% per year. In commercial real estate, it is 39 years and 2.56% annually.
It is also important to understand that the land a building sits on does not depreciate over time. The main value of most depreciating real estate is attributed to the buildings, with a smaller portion assigned to the land.
This is not the case in mobile home parks. Instead, we rent land to homeowners. Imagine it as a big parking lot where the cars (mobile homes) almost never leave because of the high cost of transport. Nevertheless, since we rent the land to homeowners, we are also responsible for maintaining utilities such as water lines, sewer lines, roads, etc. Mobile home parks typically have only a few buildings, such as an office, a community center, and a maintenance shed. The majority of our depreciation is related to infrastructure. These include roads, water lines, sewage systems, parking lots, etc.
In the case of infrastructure, depreciation is calculated on a 15 year schedule, or 6.66 per year. 35% of the park’s value can be written off as infrastructure depreciation. The raw land will represent about 30% of the asset value, and we can write off the remaining 35% as goodwill. There is also a 15-year straight line depreciation schedule for goodwill.
Thus, 70% of the value of a mobile home park can be written off with a 15-year straight-line depreciation schedule.
In a depreciation schedule over 15 years, 70% of an asset’s value is equal to 4.66% per year (70% / 15). To determine a multiplier for tax purposes, you need to know the loan-to-value ratio of the property. In this example, assume we acquire the asset at 65% LTV.
This is how the math looks: 1/(1-.65) = 2.85.
By multiplying 4.66 by 2.85, we can calculate 13.28% annually.
So what’s the point of all this boring math? If you are an investor in the mobile home park industry, you could end up with zero income on your K-1 for distributions of up to 13.28%.
With that said, I am not a tax professional so make sure to consult a qualified accountant or an attorney for proper advice.
Mobile home parks have many advantages over other forms of real estate, including better tax savings for investors. If you would like more information on how you can invest in the lucrative world of mobile home parks, please visit our website at MHPinvestors.com.