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Smart real estate investors know that success isn't just about generating income—it's also about maximizing tax efficiency. Mobile home park (MHP) investments offer some extraordinary advantages through depreciation that other real estate investments simply can't match.
Let's explore how savvy investors can leverage depreciation strategies in the mobile home park sector to enhance their returns.
The IRS recognizes that real estate assets naturally deteriorate over time. To account for this, property owners can claim depreciation as a tax deduction, even if the property's actual value increases. This creates a "paper loss" that can offset rental income and reduce tax liability.
Different types of real estate depreciate on different timelines. Traditional commercial properties depreciate over 39 years, while apartment buildings use a 27.5-year timeline. Let's say you invest $1,000,000 in an apartment complex—you can deduct about $36,363 per year in depreciation ($1,000,000 divided by 27.5).
But mobile home parks? They depreciate over just 15 years. That same $1,000,000 investment now gives you $66,666 in annual depreciation deductions. That's nearly double the tax benefit in almost half the time.
The benefits don't stop at the standard 15-year depreciation schedule. Through cost segregation, investors can identify components within their mobile home parks that qualify for even shorter depreciation timelines—some as brief as five years. This strategy involves breaking down the property into its constituent parts and applying the most advantageous depreciation schedule to each component.
A professional cost segregation study requires an upfront investment but can yield substantial returns. These specialists analyze every aspect of the property to ensure assets are classified optimally while maintaining full IRS compliance.
Let me share a real example from my own experience. In 2023, my investment company purchased an MHP for $44,450,000. After subtracting the land value of $7,348,000, we had a depreciable basis of $37,102,000. Using standard depreciation, this would have given us annual depreciation "losses" of $1,349,163.
But we didn't stop there. We brought in cost segregation specialists who found that 97% of the property (about $36 million) could be depreciated over 15, 7, and 5 years. Then, using bonus depreciation—a powerful tax incentive that allows for accelerated depreciation of assets with useful lives under 20 years—we were able to depreciate nearly $29 million in 2023 alone. This resulted in investors receiving passive losses equivalent to 135% of their invested capital on their K-1 statements.
Bonus depreciation, introduced to stimulate business investment through immediate tax relief, allows owners to front-load depreciation deductions. This lets businesses like mobile home parks reinvest capital sooner, spurring economic growth.
But the window of opportunity is shrinking—legislative changes will reduce first-year bonus depreciation to 40% in 2025, with further decreases coming.
Investors aiming to maximize their capital and passive losses should act quickly to capture these higher deduction rates while they last.
To maximize depreciation benefits in mobile home park investments, here are a few steps investors should take:
Remember, it was Warren Buffett who famously said, "The first rule of investment is, 'Don't lose,' and the second rule of investment is, 'Don't forget the first rule.'"
Depreciation strategies in mobile home park investments offer a powerful way to enhance after-tax returns. By combining accelerated depreciation schedules with cost segregation and bonus depreciation, investors can create significant tax advantages that free up capital for additional investments.
However, given the upcoming changes to bonus depreciation rules, the window for maximizing these benefits is closing. Investors interested in leveraging these advantages should consider acting sooner rather than later.
Visit investwithsunrise.com today to learn more.
About Sunrise Capital Investors:
Sunrise Capital Investors specializes in mobile home park investments, focusing on long-term wealth building with a "forever hold" model. Their track record includes 28 consecutive quarters of on-time distributions, offering 8-10% preferred returns and significant tax advantages. They operate with conservative leverage and vertically integrated management, targeting accredited investors seeking stable, tax-efficient passive income.
Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.