How Depreciation Recapture Works When You Sell Your Mobile Home Park

By Harry Shurek, EA | The MHP Accountant®

You’ve owned your mobile home park for a decade. You’ve taken depreciation every year — maybe even did a cost segregation study and front-loaded significant deductions. Your adjusted basis is much lower than what you paid. And now a buyer is at the table with a number that makes you want to close.

Then your accountant says the phrase that makes every MHP owner stop mid-celebration: “depreciation recapture.”

Depreciation recapture is not a penalty. It’s a feature of the tax code designed to collect taxes on deductions you already received. But it operates at higher tax rates than long-term capital gain rates, it triggers in ways many MHP owners don’t expect, and misunderstanding it can lead to catastrophic surprises at closing.

This post explains exactly how depreciation recapture works for mobile home park sellers — covering both the real property and personal property components of a typical park sale.

What Is Depreciation Recapture?

When you sell a depreciable asset for more than its adjusted basis (cost minus accumulated depreciation), you have a gain. The portion of that gain attributable to depreciation deductions you already took is “recaptured” — taxed at rates higher than standard long-term capital gain rates.

The IRS’s rationale: you already received a tax benefit when you took those deductions. When the asset sells for more than your depreciated basis, the government recaptures a portion of that benefit.

For MHP sellers, recapture is more complex than for a simple apartment sale because a mobile home park contains multiple asset classes with different recapture rules.

Section 1245 Recapture: Personal Property in Your Park

Section 1245 of the Internal Revenue Code applies to personal property and to certain real property that was depreciated faster than the straight-line method. For MHP operators, the primary Section 1245 assets are:

• Park-owned homes (POHs): Mobile homes that are not permanently affixed to real estate are personal property under federal tax law. When you sell them — individually or as part of a park sale — all depreciation previously taken on each POH is subject to Section 1245 recapture.
• Equipment: Maintenance equipment, golf carts, laundry machines, and similar assets depreciated under MACRS are personal property subject to 1245 recapture.
• Certain Land Improvements: If a cost segregation study reclassified site improvements to 5-year or 7-year personal property, those reclassified amounts are subject to 1245 recapture, not the more favorable 1250 treatment.

Section 1245 recapture is taxed as ordinary income — at your full marginal income tax rate, not the preferential capital gains rate. For a high-income MHP owner, this means recaptured amounts on POHs and equipment can be taxed at the top federal rate, plus applicable state income tax.

The recaptured amount is the lesser of: (a) the depreciation actually taken, or (b) the gain on the sale of the asset. If your total gain on a POH equals $15,000 and you’ve taken $12,000 in depreciation, you recapture $12,000 at ordinary rates and recognize $3,000 of capital gain.

Section 1250 Unrecaptured Gain: Real Property in Your Park

Section 1250 applies to depreciable real property — buildings, structural components, and 15-year land improvements that were not reclassified to personal property. For MHP sellers, this primarily includes:

• Roads, utilities, and site improvements classified as 15-year property and depreciated straight-line
• Any community buildings (clubhouses, office structures)
• POHs that are permanently affixed to real estate (converted to real property)

Unrecaptured Section 1250 gain is taxed at a maximum federal rate of 25% — lower than ordinary income rates but higher than the standard 15% or 20% long-term capital gain rate. The key distinction: this is the gain attributable to depreciation that was taken on real property at the straight-line rate.

Note that the 25% maximum rate is a ceiling, not a floor. If your ordinary income tax rate is below 25%, the unrecaptured 1250 gain is taxed at your actual rate.

The Impact of Bonus Depreciation and Cost Segregation

If you took bonus depreciation on personal property through a cost segregation study, you accelerated significant deductions into earlier years. At sale, you face the full Section 1245 recapture on everything you reclassified — at ordinary income rates — even if you took it as a 100% first-year deduction years ago.

This is the fundamental trade-off of cost segregation: you receive large upfront deductions (the “time value of money” benefit) but face larger ordinary income recapture at sale. For MHP owners who intend to sell within a few years, the recapture cost at ordinary rates may erode the benefit of early deductions. For long-term holders, the time value advantage remains real.

If you’re considering a cost segregation study, model both scenarios — hold for 10+ years vs. sell in 3–5 years — before electing bonus depreciation.

How a 1031 Exchange Defers Recapture

A like-kind exchange under Section 1031 defers recognition of both capital gain and depreciation recapture. When you exchange your MHP for qualifying replacement property, the accumulated depreciation on your relinquished park carries over to the replacement property through a carryover basis adjustment.

You don’t pay recapture at the exchange. Instead, your replacement property starts with a lower adjusted basis (reflecting the deferred gain and recapture), which means depreciation deductions on the new property are smaller — and recapture at the eventual sale of the replacement property is higher.

Critical post-TCJA limitation for MHP sellers: the personal property components of a park — specifically POHs that were not permanently affixed — may not qualify for 1031 like-kind exchange treatment under the current tax code. Since the Tax Cuts and Jobs Act, like-kind exchange treatment is limited to real property. Personal property 1031 exchanges were eliminated. This means the Section 1245 recapture on POHs and equipment may be triggered even in a 1031 structure unless the transaction is properly planned.

Why Installment Sales Do NOT Defer Recapture

Many MHP sellers assume that carrying back seller financing through an installment sale defers all taxes until they receive payments. This is partially correct — capital gain on real property can be spread over the payment period under installment sale reporting rules.

But Section 453(i) of the Internal Revenue Code requires that depreciation recapture be recognized in full in the year of sale — regardless of how much of the purchase price you actually received that year.

This is one of the most expensive surprises in MHP selling. If you sell your park on a seller-financed installment note and receive only 10% in the closing year, you still owe income tax on 100% of your depreciation recapture for that year. The remaining gain (above recapture) can be spread over payments, but the recapture cannot.

For a park with $500,000 of depreciation recapture, that means a large tax bill in year one — funded entirely from the initial down payment. MHP sellers carrying seller financing need to plan for this tax liability in advance. See our comparison post on 1031 exchanges vs. installment sales for MHP sellers.

Estate Step-Up: The Ultimate Recapture Elimination

Under IRC Section 1014, assets receive a stepped-up basis at the owner’s death equal to fair market value. Accumulated depreciation — and the associated recapture liability — disappears entirely. Heirs inherit the property at its current value with no income tax owed on decades of depreciation.

For older MHP owners who are weighing a sale against a hold-and-transfer strategy, the estate step-up is a powerful argument for holding. The recapture that would cost significant taxes during life is permanently extinguished at death.

Estate planning considerations (potential changes to step-up basis rules, estate tax exposure, entity structure) are complex and should be reviewed with both a tax professional and an estate planning attorney. But the basic principle — step-up eliminates recapture — is a foundational concept for MHP wealth transfer planning.

Frequently Asked Questions

External Resource: See IRS Publication 544 — Sales and Other Dispositions of Assets for the complete statutory framework governing depreciation recapture.

Disclaimer: This post is for educational purposes only and does not constitute tax, legal, or financial advice. Tax law is complex and subject to change. Every MHP seller’s situation is unique. Consult a qualified tax professional before making decisions based on this content. The MHP Accountant® is available for individual consultations at the contact information above.