Narrative
In 2023, the owners of a mobile home park in South Beloit, Illinois undertook strategic tax planning to enhance their investment. The property consists of 7 buildings encompassing a total of 286,130 square feet. Originally constructed in 2023, the mobile home park features 339 mobile home pads designed to cater to a variety of residents.
The property showcases amenities such as a clubhouse with a bar, kitchen, and beach furniture. The sales model is well-appointed with decor, furniture, and a mini-split HVAC system. The property also includes recreational facilities such as a wood foot bridge.
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.
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: $200,051.57
Percentage of Total Depreciable Basis: 5.0%
5-year class life assets identified in this study include:
- Furniture and fixtures in clubhouse and sales model
- Kitchen equipment and appliances
- Electrical supplies and lighting
- Computers and telephone connections
7-Year Class Life
Total Depreciation Allocation: $34,696.30
Percentage of Total Depreciable Basis: 0.9%
7-year class life assets identified in this study include:
- Decor and furnishings in sales model
- Mini-split HVAC system in sales model
15-Year Class Life
Total Depreciation Allocation: $2,796,416.39
Percentage of Total Depreciable Basis: 70.0%
15-year class life assets identified in this study include:
- Land improvements such as paving, fencing, and signage
- Site utilities including electrical panels and sewer lines
- Recreational structures like the wood foot bridge
39-Year Class Life
Total Depreciation Allocation: $789,535.95
Percentage of Total Depreciable Basis: 19.8%
39-year class life assets identified in this study include:
- Structural components of buildings
- HVAC, plumbing, and electrical systems
- Doors, windows, and roofing
Class Life Details:
Summary
The cost segregation study for this mobile home park in South Beloit, Illinois 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 cashflow. This approach not only enhanced the mobile home park's profitability but also allowed for more efficient capital management and future property upgrades. The case study illustrates how cost segregation can significantly boost the financial performance of real estate investments.
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