Maximizing Real Estate Tax Efficiency with Manufactured Housing Communities
Manufactured housing communities (MHCs) are one of the most tax-efficient real estate asset classes available. When we acquire a community, the property’s value is allocated across land, buildings, and land improvements. Critically, 60–80% is typically classified as land improvements, which are depreciated over 15 years—far shorter than the typical 27.5–39-year timeline for other real estate assets.
Thanks to recent changes in tax law, bonus depreciation now allows investors to depreciate up to 60% of the property’s value in year one, creating substantial paper losses that offset capital gains and other passive income. The remaining 40% of depreciation is realized in future years. These benefits can be amplified through conservative leverage (45%–55% LTV), enhancing the depreciation relative to invested capital.
For those who qualify as a Real Estate Professional under IRS rules, these deductions can also offset active income such as W-2 wages—significantly increasing after-tax returns.
At Comfort Capital, we perform detailed cost-segregation studies using engineering-based analysis and current construction data. This meticulous process ensures highly accurate depreciation schedules, forming the foundation of our tax-advantaged investment strategy.
The Lazy 1031 Exchange: Simplicity Meets Tax Efficiency
A traditional 1031 exchange allows for capital gains deferral but requires a Qualified Intermediary and imposes a strict 180-day replacement timeline—making the process stressful and rigid.
The Lazy 1031 Exchange offers a simpler alternative: sell a rental property and reinvest the proceeds within the same tax year into another rental asset or real estate fund. While informal, the strategy achieves a similar outcome by using bonus depreciation from the new investment to offset gains from the sale—without the complexity of a formal exchange.
Why MHCs Are the Ideal Fit
MHCs are uniquely suited for this strategy due to their high percentage of depreciable land improvements, which generate significant first-year depreciation. Investors can defer taxes, transition to passive income, and avoid the rigid structure of a traditional 1031—while still capturing the full tax benefits
Real Estate Professional (RESP) Status: A Powerful Tax Tool
Being classified as a Real Estate Professional under IRS rules allows you to use real estate losses—especially from bonus depreciation—to offset active income like W-2 wages or business income, not just passive income.
How to Qualify:
- Spend 750+ hours/year in real estate activities.
- More than 50% of your working time must be in real estate.
- Must materially participate in your investments.
Spousal Advantage:
If one spouse qualifies and you file jointly, both benefit from the tax savings—potentially offsetting income from a high-earning spouse’s W-2 job.
Why It Matters:
Pairing RESP status with highly depreciable assets like Manufactured Housing Communities (MHCs) can eliminate or significantly reduce your tax bill in year one.
Comfort Capital can help you structure your investments to take full advantage of these benefits!
