Cost Segregation and Bonus Depreciation: How They Work Together for MHP Owners

If cost segregation is the key that unlocks accelerated depreciation for your mobile home park, bonus depreciation is the turbocharger. Used together, they can convert a large portion of your acquisition cost into a current-year tax deduction — in the year you buy the park.

But bonus depreciation has a phase-down schedule under current law, and the interaction between the two provisions has specific mechanics that MHP owners need to understand. This post covers how these tools work together, what the phase-down means for your timing, and when you might actually want to elect out of bonus depreciation.

Why Most MHP Assets Are Locked Out of Bonus Depreciation Without Cost Segregation

This is the foundational point that most advisors underexplain: bonus depreciation eligibility is tied to MACRS recovery period. Under current law, property with a recovery period of 20 years or less qualifies for bonus depreciation. Property with a recovery period longer than 20 years does not.

Without cost segregation, most of what you buy when you purchase a mobile home park falls into two categories: land (not depreciable) and 27.5-year residential rental property (does not qualify for bonus depreciation). A handful of obvious personal property items may fall into 5-year or 7-year categories, but the bulk of the improvement value typically ends up in the 27.5-year bucket.

Cost segregation changes that equation fundamentally. By identifying and reclassifying components into 5-year and 15-year categories, the study moves substantial improvement basis into bonus-eligible territory. The result is that a large portion of your park’s improvement value — which would otherwise be depreciated over 27.5 years in equal annual increments — becomes eligible for immediate expensing in the year of acquisition.

That is the multiplicative effect. Cost segregation does not just accelerate depreciation. It creates bonus depreciation eligibility for assets that otherwise had none.

The Bonus Depreciation Phase-Down Schedule

Bonus depreciation was enacted at 100% for property placed in service after September 27, 2017, under the Tax Cuts and Jobs Act. It began a scheduled phase-down after that window. The phase-down schedule under current law reduces the available bonus percentage over time.

The applicable bonus depreciation percentage depends on when the property is placed in service. Because tax law continues to evolve and Congress has periodically modified the phase-down schedule, the specific applicable rate for property you are acquiring today should be verified with your MHP tax advisor and confirmed against current IRS guidance.

What this means practically: the economics of cost segregation combined with bonus depreciation are most powerful when the highest available bonus rate applies. As the percentage decreases, the portion of reclassified assets that can be immediately expensed shrinks, and more of the benefit is delayed into future years on an accelerated (but not immediate) schedule.

This is one reason why timing the study at acquisition — rather than waiting for a lookback study years later — is typically more favorable. The bonus depreciation rate available in your acquisition year may be higher than what will be available by the time you get around to doing a lookback study.

How the Math Works: A Structural Illustration

The following is a structural illustration of how cost segregation and bonus depreciation interact. These are illustrative categories and percentages, not guaranteed outcomes for any specific park. Actual reclassification percentages depend on the specific property’s characteristics and the study findings.

The key insight from this table: without cost segregation, the vast majority of your improvement basis falls into 27.5-year property — which is ineligible for bonus depreciation. With cost segregation, a substantial portion moves into 5-year and 15-year categories, unlocking bonus depreciation on those amounts.

Election Mechanics: How You Claim Bonus Depreciation

Bonus depreciation is automatic — it applies unless you elect out. When you place bonus-eligible property in service and do not make an election to opt out, bonus depreciation is applied at the applicable rate. You don’t need to do anything affirmative to claim it.

The election-out option is important, however. You can elect out of bonus depreciation on a class-by-class basis (all 5-year property, all 15-year property, etc.) for a given tax year. The election is made on your tax return and applies to all property in the elected class placed in service that year.

The election-out is irrevocable once made for that year. If you elect out of bonus depreciation on your 15-year land improvements and later change your mind, you cannot amend to reclaim it. This is another reason why the decision about whether and how to use bonus depreciation should be made carefully, in advance, with your MHP tax advisor.

When You Might Elect Out of Bonus Depreciation

There are legitimate situations where electing out of bonus depreciation — even after a cost segregation study — is the right call. This is a nuanced area that requires a complete view of your tax situation.

Your income is low in the acquisition year. If you are not going to generate significant taxable income in year one, taking large bonus depreciation deductions creates losses that may sit as passive loss carryforwards — or simply reduce a taxable income number that was already modest. The future-year depreciation from a regular MACRS schedule might serve you better if your income will be higher in future years.

You are in a state with bonus depreciation decoupling. Many states do not conform to federal bonus depreciation rules. If your park is in a state that requires you to add back bonus depreciation for state tax purposes, your state taxable income will be higher even though your federal income is lower. In high state-tax jurisdictions, this can reduce the net benefit of bonus depreciation significantly. Your MHP accountant should model both federal and state tax impact.

You anticipate selling or exchanging the property in the near term. Bonus depreciation accelerates Section 1245 recapture. If you are considering a 1031 exchange within a few years, electing out of bonus depreciation on some assets might reduce your recapture exposure if the exchange fails or is not completed within the 180-day window. This is a planning conversation, not a blanket recommendation.

You want to preserve basis for state tax purposes. Some state income tax calculations favor having a higher depreciated basis in property, or the state NOI impacts financing covenants. Electing out preserves basis and spreads the deductions, which may be preferable in specific circumstances.

The Used Property Rule and Acquired MHPs

When you acquire an existing mobile home park — rather than building one from scratch — the property involved is generally “used” property. Bonus depreciation on used property has specific rules that differ from the rules for new property.

Used property qualifies for bonus depreciation if, among other requirements, the taxpayer has not previously used the property, the property was not acquired from a related party, and the property was not acquired in a carryover basis transaction. These requirements are typically satisfied when you purchase a park at arm’s length from an unrelated seller.

The interaction with Form 8594 purchase price allocation is significant. The allocation of purchase price among asset categories, as documented on Form 8594, determines what portion of your acquisition cost is assigned to bonus-eligible categories. A thoughtful allocation that reflects the actual mix of 5-year, 15-year, and 27.5-year property — supported by the cost segregation study — maximizes bonus-eligible basis while remaining defensible.

For more detail on how cost segregation interacts with the acquisition process and Form 8594, see our post on cost segregation for newly acquired vs. existing MHPs. For a full discussion of recapture implications when you eventually sell, see cost segregation recapture at sale. And if you are still evaluating whether cost segregation makes sense for your park at all, the foundational comparison is in our straight-line vs cost segregation analysis.

Frequently Asked Questions

Disclaimer: This post is for educational purposes only and does not constitute tax, legal, or financial advice. Tax laws change and individual circumstances vary. Consult a qualified tax professional before making any decisions based on information in this article. The MHP Accountant® is an enrolled agent firm; services do not include legal advice.