Minimizing Taxes through Investing in Manufactured Housing Communities
Investing in Manufactured housing communities “MHCs” offers an amplitude of tax benefits. MHCs are one of the most protected and efficient asset classes that offer strong returns and immense tax benefits. Two of these benefits include bonus depreciation and cost segregation. These benefits go hand-in-hand, by using cost segregation to depreciate the assets or fixtures over an accelerated period of time while bonus depreciation allows investors to depreciate a portion(60%) of the assets value in the first year.
Bonus Depreciation
Bonus depreciation is a tax incentive that allows investors to immediately deduct large percentages of the cost of qualifying assets in the year they are placed in service rather than over its lifespan.
Key Features of Bonus Depreciation:
- Accelerated deduction: Instead of spreading out the depreciation over several years, it allows you to write off a portion of the items cost in year one(currently 60% in 2025).
- Eligible Assets: Applies to most tangible personal property with a useful life of 20 years or less, including:
- Equipment and machinery
- Certain qualified improvement property (e.g., interior improvements to nonresidential buildings)
- Land improvements (roads, utility hookups, landscaping in manufactured housing communities)
Why bonus depreciation matters to investors in manufactured housing communities. A large amount of the purchase price of MHCs can be attributed to depreciable land improvements. By identifying and classifying these improvements investors can unlock substantial first year tax deductions. Taking advantage of bonus depreciation can substantially reduce taxable income in the early years of an investment. This will help boost cash flow and after tax returns, which allows investors to reinvest sooner and build generational wealth.
Cost Segregation and Bonus Depreciation Work Hand-in-Hand.
Cost segregation is a strategy that involves reclassifying components of the property into shorter lived asset categories which allows investors to accelerate the depreciation period. This allows for upfront tax savings by identifying land improvements and fixtures that can be written off over 5, 7, or 15 years rather than the standard 27.5 or 39 years.
Shorter depreciation periods are better for investors because they allow you to deduct more of a property’s cost sooner, which offers several key benefits:
- Larger tax deductions in early years – This reduces your taxable income right away, leading to lower tax bills and improved cash flow when it’s most valuable—often during the initial investment phase.
- Time value of money – Deductions taken earlier are worth more than the same deductions taken later, because the money saved on taxes today can be reinvested or used for growth.
- Paper losses for tax efficiency – Accelerated depreciation can create “paper losses” (non-cash expenses) that offset income from the property or other sources, reducing your overall tax liability without affecting actual cash earnings.
Cost segregation and bonus depreciation work together to maximize tax savings in real estate investments like manufactured housing communities. Cost segregation identifies property components—such as roads, utility lines, and landscaping—that qualify for shorter depreciation schedules of 5, 7, or 15 years, while bonus depreciation allows investors to accelerate the deduction of these assets, enabling up to 60% to be deducted in the first year.
