Investors love mobile home parks (MHPs) because of their recession-resistant qualities and their ability to deliver stable cash flow. MHP investments also provide a lesser-known, yet equally compelling advantage: tax efficiency.

When evaluating an investment, investors typically focus on how much money they can make. However, it’s important to not overlook another key element: an investment’s tax efficiency, which impacts how much money investors get to keep.

Why are mobile home parks more tax efficient than other types of real estate, and therefore, more favorable for investors? Let’s take a look.

Delving into Depreciation

“Depreciation” is an accounting term that refers to the reduction in a property’s value over time, particularly due to wear and tear. Essentially, depreciation assumes that everything has a limited useful life and that things tend to gradually wear out.

The U.S. tax code assigns a useful life to commercial real estate, generally 39 years. For tax purposes, a property is assumed to wear out, or depreciate, a little bit each year over that period of time. Depreciation is treated as an expense, so by expensing a portion of the property each year, investors reduce taxes on the income they earn, allowing them to keep more of what they make.

The faster a property can be depreciated, the greater the property’s tax efficiency, and the greater tax advantage. The U.S. tax code allows some types of real estate to be depreciated faster than others. This is where mobile home parks gain such a significant advantage.

The Mobile Home Park Investment Advantage

For accounting purposes, when a property is purchased, the property’s value is generally divided into three buckets, based on useful life expectancy.

Unlike most other types of real estate, a large portion of a mobile home park’s value often comes from land improvements, allowing depreciation at a much faster rate. Herein lies the powerful tax advantage of MHPs that investors love.

A Real-Life Example of Mobile Home Park Investment Tax Efficiency

Let’s look at a simple example of a mobile home park compared to a commercial building. For comparison purposes, we’ll assume both properties are in a similar neighborhood, with the same purchase price of $3 million and non-depreciable land value of $900,000, leaving $2.1 million that can be depreciated.

With the commercial building, most of the remaining $2.1 million would be allocated to the building bucket and depreciated over 39 years, meaning $53,846 could be expensed each year.

With the mobile home park, most of the remaining $2.1 million would be allocated to the land improvement bucket and depreciated over 15 years, meaning $140,000 could be expensed each year.

This is an extremely simplified example, but it demonstrates the enormous difference between the two real estate types in terms of tax efficiency. With more of the property expensed each year, mobile home park investors can dramatically reduce their taxes and keep more of what they make.

With the added power of bonus depreciation, the land improvement bucket of a mobile home park can be completely expensed in the first year of ownership. This can be extremely attractive for investors seeking tax losses to offset larger gains.

Note: Depreciation and bonus depreciation do not eliminate taxes. Rather, they delay the tax payments until the property is sold. In other words, investors pay less tax on the income while they’re invested. In some cases, they pay no taxes at all.

Appreciation for Depreciation

The accelerated depreciation afforded to mobile home parks makes them one of the most tax-efficient types of real estate. Essentially, investors can enjoy tax-“free” income from a predictable strategy while they are invested, and defer the tax until the exit.

Mobile home parks are known for their recession resistance and ability to deliver consistent cash flow, but their tax efficiency makes them even more attractive.

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.

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