Although this is an overly simplified example, you can see the enormous difference between the two real estate types in terms of tax efficiency. With a greater portion of the property expensed each year, mobile home park investments can dramatically reduce investors’ taxable income and keep more of what they make.
The benefits of depreciation became even more attractive in recent years when the Tax Cuts and Jobs Act of 2017 increased first-year bonus depreciation to 100%. Applied to a mobile home park, this means the entire land improvement bucket can be expensed in the first year of ownership, instead of over a 15-year period.
This can be immensely attractive for investors seeking tax losses to offset passive investment gains they have received in that same calendar year. Due to the time value of money, tax deferral is extremely valuable. Every tax dollar deferred contributes to a greater return on investment.
Depreciation and bonus depreciation defer taxes until the property is sold. In other words, investors pay less tax on the income while they’re invested and are able to offset passive investment income from other sources. The use of bonus depreciation can be an alternative strategy for investors who are not able to successfully execute a 1031 exchange.
Investors in higher tax brackets will realize a lower tax rate when the property is sold than they would have if depreciation was not utilized. This “tax arbitrage” strategy lowers their overall tax bill and is an additional benefit beyond the time value of money.
Appreciation for Depreciation
The accelerated depreciation afforded to mobile home parks makes them one of the most tax-efficient real estate investments. With bonus depreciation, investors get to enjoy “tax-free” income from a predictable strategy while they are invested, and offset qualified passive income from other sources.
Mobile home parks are already known for their recession resistance and ability to deliver consistent cash flow, but their tax efficiency is yet another reason they are one of the most attractive investments in real estate.
This content is the perspective of the author and is not intended to be relied upon as a forecast, recommendation or investment advice, and is not an offer or solicitation to buy any securities or to adopt any investment strategy. The information and opinions contained in this content are derived from experience, historic data, and other sources deemed to be reliable, are as of the date of this content, and may change as subsequent conditions vary.