The Tax Advantages of Investing in Mobile Home Parks
Taxes are one of life’s inevitabilities. Although taxes have been called “the price we pay for a civilized society”, it can hurt to see a lot of our earnings vanish into government coffers. Most people would agree that paying a fair tax is a reasonable request, but investors also have a right to pay ONLY the taxes required of them… and not a penny more.
This is in line with Warren Buffett’s “number one rule for investing – don’t lose money.” Investors need to understand the opportunities to legally pay only the taxes they owe, as well as the advantages, benefits, and tax breaks available for investing in mobile home parks.
So, what are the tax advantages of buying mobile homes, and investing in mobile home parks?
A dollar saved in taxes is worth a dollar earned. When those savings are compounded year after year, tax savings may be even more important than earned dollars. This is why sophisticated investors prioritize taxes when investing. So are there tax advantages to be found in mobile homes? How can they be maximized?
Tax Breaks for Mobile Home Buyers
Mobile home buyers, like other home buyers are entitled to an array of potential tax breaks. This may include:
- Capital gains tax exemptions
- Mortgage Interest Deduction (MID)
- Mortgage insurance premiums
- Property taxes
Seller financing is quite common in the mobile home world. This can come into play when selling individual mobile or manufactured homes, and when selling entire mobile home parks. As the proceeds of the sale are spread out over time, sellers are able to minimize their tax burden (and potentially tax rate) in any given year. Some of this income and returns may be pushed off to years when tax rates are even lower. However, there is always the potential for using 1031 exchanges for real estate investors that are moving into other similar investments. This can also be an attractive strategy for those interested in moving from other types of property investments to the benefits of mobile home parks.
There may be both state and local tax breaks and special financing programs for those looking to make improvements, and especially green and energy efficient improvements to mobile homes and parks. While manufactured home manufacturers are working to become greener, there is immense room for improvement at existing parks and in existing homes. This is the opportunity to do some good for the environment, the community, mobile home tenants, and your net profits, all at the same time. Solar power, battery backups, rainwater harvesting, and better insulation are all examples of potential green improvements.
Investing in Real Estate as a Business
Warren Buffett’s mentor Benjamin Graham said “investment is best when most businesslike.” Those that derive most of their income from being a landlord, or spend most of their working time in real estate, can be privy to additional tax breaks, exemptions, deductions, and write-offs.
These tax benefits and breaks may include:
- Home offices
- Travel and entertainment expenses
- Legal and professional fees
- Property management
- Other operational investments
These breaks can potentially provide another whole layer of tax savings, with paper losses which can even be rolled over into following years to offset future income taxes. Just make sure you work with your accountant to create a smart tax plan that maximizes these savings, and avoids waste and budget items that won’t offer net savings at tax filing time.
Self-Directed IRA Investing
Savvy investors are increasingly using self-directed retirement accounts to add even another layer of tax protection to real estate investments. Today, mobile home park investors can open new self-directed retirement accounts, or rollover existing IRAs and 401ks to self-directed accounts. This gives investors control over where their money is invested, while retaining all of the tax benefits, and preferred status and security of retirement account classification. This means tax deferred or tax free returns. This can add double digit net returns each year. That is money that can also be reinvested with the same tax benefits each year. This means a compounding snowball of savings and gains that can put mobile home park investors far ahead of others. uDirectIRA and Entrust are two of the self-directed retirement account administrators currently assisting investors in this space.
Tax deductions for depreciation is where mobile home park investing really stands out as a superior tax saving, cash flow and net return maximizing vehicle. Mobile homes enjoy an accelerated depreciation allowance. This enables investors to depreciate their investments in just 15 years, or about half the time of apartment buildings and other income producing commercial properties. This is includes an extra 50% special bonus deduction under the Modified Accelerated Cost Recovery System aka MACRS 150. This helps investors recoup their investment faster, pay less tax in prime years, and maximize cash flow. This alone can provide mobile home park investors with a substantial edge in returns against their peers. This additional perk also acts as a buffer, and reduces risk, by creating a fatter cash flow cushion.
Tax Planning & Strategy
Taxes may not be fun for many individuals. Unless you are a tax accountant you’d probably far prefer being on the golf course, on a cruise, relaxing by the beach, or making big new real estate plays. But, paying attention to taxes can create far superior investment performance. And if you can enjoy better returns with a few tweaks, why not? Sophisticated individuals take the time to sit down with a tax specialist, create a long term tax plan, and have tax saving tactics to put into play annually, and when making new investments. Once this is in place all of the mind numbing technicalities can be left to those who specialize in the numbers, while investors get to enjoy more of the rewards they desire. And this report just scratches the surface of potential tax tools. There is reinsurance and trusts, as well as smarter annual spending, that can all yield big differences.
Mobile homes, and mobile home parks offer a wide variety of potential tax breaks. From the entity used to make the acquisition to the type of leverage used, to how improvements are classified, and professional assistance, there are many ways to save taxes, and enjoy more tax breaks. Then there is accelerated depreciation which gives mobile home park investors an envied, but often overlooked advantage in the market, and in wealth building, asset protection, and passive income generation.