Narrative
In 2024, the owners of a mobile home park in Florida undertook strategic tax planning to enhance their investment. The property, purchased for $58,000,000, consists of four single-story buildings originally constructed in 1972. The mobile home park features various amenities designed to create a comfortable and engaging community environment.
The property includes a clubhouse with an office area, equipped with contemporary features such as security camera systems, audio/video equipment, and computer network connections. Recreational amenities on the property include a swimming pool with concrete deck, playground area with specialized equipment and artificial turf, basketball court, and shuffleboard court. The grounds are enhanced with wrought iron fencing, site lighting, fountains, and professionally landscaped areas.
The owners engaged Engineered Tax Services (ETS) to perform a comprehensive cost segregation study of the property. This study aimed to identify and reclassify specific assets, enabling the acceleration of depreciation and optimizing tax benefits. This case study outlines the cost segregation strategy employed and its significant impact on the financial outlook of the property.
Objective
The primary objective of the cost segregation study was to identify and classify the mobile home park's assets to optimize the owners' tax savings. By breaking down and reallocating components into shorter depreciation life categories, ETS aimed to provide both immediate and long-term financial benefits through accelerated depreciation. Given the substantial investment value of $58,000,000, even incremental improvements in depreciation timing could yield significant cash flow advantages.
Methodology
ETS employed a detailed, engineering-based approach, which included:
- Physical Inspection: conducting a thorough site visit to identify and photograph the property's components
- Document Review: examining architectural plans, construction documents and accounting records
- Cost Analysis: applying engineering principles to allocate costs to specific asset classifications
- Depreciation Calculation: calculating depreciation using IRS-accepted methods such as the Modified Accelerated Cost Recovery System (MACRS)
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Discover MoreAsset Allocation
5-Year Class Life
Total Depreciation Allocation: $4,188,848.87 Percentage of Total Depreciable Basis: 7.6%
5-year class life assets identified in this study include:
- Office equipment outlets and connections
- Security camera systems
- Television and computer network connections
- Telephone connections
- Kitchen equipment (compartment sinks, countertops)
- Laminate wood flooring
- Gym equipment and rubber flooring
- Decorative elements (metal wallcoverings, wood panels, track lighting)
- Audio/video equipment
- Dedicated electrical equipment and panels
15-Year Class Life
Total Depreciation Allocation: $41,470,306.73 Percentage of Total Depreciable Basis: 75.27%
15-year class life assets identified in this study include:
- Mobile home utility connections
- Concrete paving and sidewalks
- Retention pond
- Swimming pool and pool deck
- Playground equipment and surfaces
- Artificial turf
- Wrought iron fencing and chain link fences
- Site concrete equipment pads
- Monument sign
- Site lighting (poles and fixtures)
- Site fountain
- Asphalt paving
- Basketball and shuffleboard courts
- Site mailboxes
27.5-Year Class Life
Total Depreciation Allocation: $9,437,074.41 Percentage of Total Depreciable Basis: 17.13%
27.5-year class life assets identified in this study include:
- Drywall partitions with metal studs
- Building slabs and footings
- Perimeter walls
- Exterior storefronts
- Fire alarm systems
- General lighting fixtures
- Water heaters
- Roofing systems
- Interior doors and fixtures
- General electrical services
- Plumbing systems
- HVAC systems and ductwork
Class Life Details:
Summary
The cost segregation study for this mobile home park in Florida demonstrates the substantial financial advantages of strategic tax planning. By reclassifying property components into shorter depreciation categories, the study enabled accelerated depreciation, resulting in maximized tax savings and improved cash flow.
With the 60% bonus depreciation applied to 5-year class life assets, the property owners were able to significantly front-load their depreciation deductions. This approach not only enhanced the mobile home park's immediate profitability but also allowed for more efficient capital management and future property upgrades.
The total increase of depreciation was $27,383,938.24 for the first year alone, representing a nearly 20-fold improvement in first-year depreciation when compared to straight-line depreciation over 27.5 years. This case study illustrates how cost segregation can dramatically boost the financial performance of real estate investments, particularly for properties with substantial site improvements like mobile home parks.
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