Mobile Home Park Acquisition Due Diligence: The Tax Items Nobody Checks

By Harry Shurek, EA | The MHP Accountant®

Most MHP buyers spend their due diligence budget on physical inspections — septic, well, electrical, and structural. Those are legitimate concerns. But the tax items buried in the seller’s filing history can cost you far more than a failing lift station, and almost nobody checks them systematically.

You can replace a pump. You cannot undo a purchase price allocation that was made without knowing the seller had built-in gain obligations, an open IRS lien, or a depreciation schedule that forces you to recapture income you never actually received. Tax due diligence is not a nice-to-have on an MHP acquisition — it is a prerequisite to knowing what you are actually buying.

Here is a line-by-line breakdown of the tax items that experienced MHP investors and their CPAs review before closing, and why each one matters to your post-acquisition economics.

Item 1: The Seller’s Existing Depreciation Schedules

The first question to ask when reviewing a seller’s tax records is: how are the park-owned homes (POHs) being depreciated? If the seller has been depreciating POHs on a 27.5-year residential schedule, that means the adjusted basis on each home is higher than it would be on a 5-year schedule — which affects the seller’s gain calculation and therefore the negotiating context for purchase price.

More importantly for you as the buyer: are there any fully depreciated assets that will affect your purchase price allocation? If the seller has been holding the park for 20+ years and has exhausted depreciation on major components, you need to know that the price you are paying is being allocated to assets that will reset their basis in your hands — and you need to verify that reset is properly documented in the purchase agreement.

A seller who has used aggressive depreciation will have significant unrecaptured Section 1250 gain and Section 1245 recapture built up in their position. That does not hurt you directly — the seller pays recapture, not you. But it absolutely affects the seller’s motivation, their willingness to accept certain deal structures, and whether a 1031 exchange is in play (more on that below).

Item 2: Outstanding IRS Liens or State Tax Liens

Federal tax liens attach to all property of the taxpayer — including real estate. If the seller has an outstanding federal tax liability, the IRS may have a perfected lien on the mobile home park that must be satisfied before or at closing. A title search will catch most recorded federal tax liens, but that alone is not enough.

You or your attorney should also request a tax compliance certificate or confirmation from the seller that there are no outstanding IRS assessments, installment agreements, or currently-not-collectible determinations that could affect the property. In some states, state income tax or franchise tax liens can also attach to real property and may not be immediately visible in a title search if they were recently assessed.

For entity acquisitions (buying the LLC or partnership that owns the park rather than the park itself), the exposure is even greater. You are acquiring the entity’s entire tax history, including any audits in progress, back taxes owed, and civil penalties. Entity acquisitions require a much deeper dive into the seller’s tax filing history than asset acquisitions.

Item 3: Open or Unclosed 1031 Exchange Obligations from the Seller

If the seller acquired the mobile home park as the replacement property in a 1031 exchange, there are downstream consequences you need to understand. The basis the seller carries in the park is the carryover basis from the relinquished property — not what they actually paid for the park. That means the seller’s adjusted basis may be significantly lower than the purchase price, resulting in a larger taxable gain upon sale.

More critically: if the seller is currently in the middle of a 1031 exchange using your purchase as the relinquished property, their 45-day identification and 180-day exchange clock has already started. That is their problem, not yours — but a seller under exchange pressure may behave differently in negotiations, may push for a faster close, or may attempt to structure terms that accelerate or delay closing in ways that benefit their exchange timeline. Understanding the seller’s exchange situation helps you interpret their behavior and protect your own position.

Also verify that there are no boot obligations or exchange liabilities outstanding that could create a claim against the property after closing.

Item 4: Passive Activity Loss Carryforwards That Won’t Transfer to You

Suspended passive activity losses (PALs) are personal to the taxpayer who generated them. When a seller disposes of a passive activity, their suspended PALs from that activity are released and become available to offset the gain from the sale. But those losses do not transfer to you as the buyer — they are extinguished in the seller’s hands at the time of the transaction.

This matters for due diligence in one specific way: a seller who has accumulated large suspended PALs from this park may be more willing to accept a lower sale price because the tax cost of the gain is being offset by those PALs. Understanding the seller’s PAL position can inform your negotiating strategy and give you insight into the seller’s true after-tax proceeds from the sale.

Item 5: Entity-Level Tax Issues — Built-In Gains in S-Corporations

If you are acquiring stock or membership interests in a pass-through entity (S-corporation or partnership) that owns the mobile home park, the entity’s tax history follows you into the acquisition. For S-corporations specifically, the built-in gains (BIG) tax under IRC §1374 can create a significant liability if the entity was converted from a C-corporation within the past five years and has appreciated assets.

A park owned by an S-corp that was formerly a C-corp may have built-in gain obligations that will be triggered by the sale of the park’s assets — even if the sale happens after the acquisition. These obligations do not disappear when ownership changes at the shareholder level. Ask directly: was this entity ever a C-corporation? If so, when was the election made and what were the entity’s assets at the time of conversion?

For partnership acquisitions, check whether the entity has any IRC §754 elections in place or any IRC §704(c) built-in gain or loss positions. These affect how income, gain, and loss are allocated to you post-acquisition and can create phantom income situations in the early years of ownership.

Item 6: Deferred Maintenance Versus Capital Improvements — The Tax Boundary Matters

Physical due diligence will identify deferred maintenance — infrastructure that has been neglected and will require repair or replacement after closing. From a tax perspective, the critical question is whether those expenditures will be immediately deductible repair expenses or capitalized improvements that must be depreciated over time.

Under the IRS tangible property regulations (the “repair regulations” under Treas. Reg. §1.263(a)-1 through -3), an expenditure is a deductible repair if it restores a unit of property to its ordinarily efficient operating condition without bettering it, adapting it to a different use, or constituting a restoration of a major component. An expenditure is a capital improvement if it betters the property, restores a major component, or adapts the property to a new use.

In an MHP acquisition, replacing a few aging electrical connections on individual lots is likely a repair. Replacing the entire underground electrical distribution system is almost certainly a capital improvement. The post-acquisition tax cost of deferred maintenance is higher than the sticker price suggests if most of the work must be capitalized and depreciated over 15 or 39 years rather than deducted immediately.

Item 7: Unreported Cash Income in Seller’s Operations

Mobile home parks that have historically operated with heavy cash rent collection — no ACH, no checks, no lease agreements — carry meaningful risk of unreported income. If the park’s books and tax returns show lot rent income that is materially lower than what the occupancy rate and lot count would suggest, that discrepancy needs to be explained.

Unreported income at the seller level does not become your obligation if structured as an asset purchase. But it does create two practical risks. First, if the IRS later audits the seller and issues adjustments that create a lien on the property, that lien may encumber your acquisition. Second, if you paid a price based on seller-reported NOI and the true NOI was lower, you overpaid based on false information — which has legal remedies but creates expensive litigation.

Request three years of bank statements alongside the tax returns. If lot rent deposits don’t reconcile to the income on Schedule E, ask for an explanation in writing. A legitimate discrepancy — like high vacancy during a turnaround period — will have a clear story. A gap that cannot be explained is a red flag requiring deeper investigation.

How to Request and Review These Items

The right time to request tax due diligence documents is when you send your physical due diligence list — not after the inspection period. Many sellers are willing to share tax returns under a mutual NDA. If a seller refuses to provide tax returns at all, that refusal is itself a material data point.

Have a CPA or EA who works with MHP investors review the documents, not a generalist accountant who may not recognize MHP-specific issues. The 1031 exchange carryover basis issue, the BIG tax exposure in S-corps, the PAL positioning — these require someone who has seen these scenarios before. A generalist will review for basic accuracy. An MHP specialist will review for strategic implications.

FAQ: Tax Due Diligence in Mobile Home Park Acquisitions

For guidance on business asset acquisitions and Form 8594, see IRS Form 8594 instructions at IRS.gov.

Related reading: How to Calculate Depreciation on a Mobile Home Park | MHP 1031 Exchange: Finding Replacement Properties in 45 Days | Phantom Income in Mobile Home Park Investing

Disclaimer: This article is for general educational purposes only and does not constitute tax, legal, or financial advice. Tax laws change frequently and the information in this post reflects general principles that may not apply to your specific situation. Consult a qualified tax professional before making any decisions based on this content. The MHP Accountant® provides tax services to mobile home park owners; engagement of our firm creates a client relationship subject to our engagement letter terms.