Case Study: Cost Segregation Analysis for a Mobile Home Park in Fort Wayne, Indiana

Narrative

In December 2023, the owners of a mobile home park in Fort Wayne, Indiana, sought to optimize their tax strategy and enhance their investment returns. The property encompasses a sprawling area with multiple mobile home units, each classified as a distinct unit of property (UOP) for tax purposes.

The mobile home park boasts well-maintained grounds, featuring paved roads, sidewalks, landscaping, and a playground. The units themselves offer various floor plans and amenities to cater to residents' needs. The owners recognized the opportunity for significant tax benefits through a comprehensive cost segregation study.

Engineered Tax Services (ETS) was engaged to perform a detailed engineering-based tax study. The goal was to identify and reclassify specific assets into shorter depreciation life categories, accelerating depreciation deductions and enhancing cash flow. This case study details the methodology employed and the substantial impact of the study on the property's financial outlook.

Objective

The primary objective of the engineering-based tax study was to identify and classify the mobile home park's assets for optimal tax savings. By segregating components into appropriate depreciation life categories, ETS aimed to provide the owners with immediate and long-term financial benefits through accelerated depreciation deductions. This study also sought to identify any retired or abandoned components for proper tax treatment, ensuring compliance with IRS regulations and maximizing deductions.

Methodology

ETS employed a rigorous, two-pronged approach, combining a detailed engineering approach from actual cost records and a detailed engineering estimate approach:

1. Detailed Engineering Approach from Actual Cost Records: This involved analyzing actual cost records, including invoices, contracts, and payment records, to identify and classify specific project items into property classes. ETS utilized quantitative “take-offs” for materials to compute unit costs and ensure accurate cost allocation.
2. Detailed Engineering Estimate Approach: This approach involved utilizing costs from contemporaneous construction and accounting records, as well as estimation techniques, to determine the costs of specific property items. ETS relied on industry standards, such as R.S. Means Cost Data, and their expertise in construction, architecture, and engineering to make accurate estimations.

Both approaches involved the following activities:

• Identification of Units of Property (UOPs): ETS identified and analyzed each mobile home unit as a separate UOP, as defined by IRS Tangible Property Regulations.
• Thorough Site Inspection: ETS conducted a comprehensive site visit, documenting the property's features through photographs and detailed observations.
• Document Review: ETS reviewed architectural plans, specifications, contracts, bid documents, and other construction documentation to gain a thorough understanding of the property's development.
• Asset Classification: ETS meticulously classified each project item into appropriate property classes based on their function and IRS guidelines.
• Cost Allocation: ETS accurately allocated direct and indirect costs, such as architectural fees, engineering fees, and permits, to specific assets.
• Depreciation Calculation: ETS calculated depreciation deductions using appropriate recovery periods, conventions, and methods according to IRS guidelines.

Asset Allocation

7-Year Class Life

Total Depreciation Allocation: $7,370,054.08 

Percentage of Total Depreciable Basis: 19.9%

7-year class life assets identified in this study include:

• paved roads
• sidewalks
• fences
• landscaping
• recreational facilities

15-Year Class Life

Total Depreciation Allocation: $28,534,437.50 

Percentage of Total Depreciable Basis: 76.9%

15-year class life assets identified in this study include the mobile home units themselves, classified as distinct units of property.

27.5-Year Class Life

Total Depreciation Allocation: $1,023,300.74 Percentage of Total Depreciable Basis: 2.8%

27.5-year class life assets identified in this study include:

• structural components
• building systems
• permanent fixtures
• interior construction of shared facilities

Class Life Details:

5-Year Class Life

Total Depreciation Allocation: $174,207.70 

Percentage of Total Depreciable Basis: 0.5%

5-year class life assets identified in this study include:

• specialized electrical systems
• appliances
• furniture
• fixtures
• interior finishes
•  communication and security systems

Accumulated Depreciation Comparison:

Summary

The cost segregation study for this mobile home park in Fort Wayne, Indiana, 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.

The study revealed that over 96% of the depreciable basis could be allocated to 5, 7, and 15-year class lives, with the 15-year class life representing the largest portion at 76.9%. This approach not only enhanced the mobile home park's profitability but also allowed for more efficient capital management and future property upgrades.

This case study illustrates how cost segregation can significantly boost the financial performance of real estate investments, particularly for properties with multiple units of property like mobile home parks.