Estate Planning and Entity Structure for Mobile Home Park Owners

Most MHP owners think about entity structure in terms of tax efficiency and liability protection today. Fewer think about what happens to the structure at death — who owns what, how the transition occurs, what the tax consequences are for heirs, and how the entity architecture either facilitates or complicates the generational transfer.

The intersection of entity structure and estate planning is where the most powerful long-term tax outcomes for MHP owners are created. The step-up in basis at death is arguably the single most important tax planning tool available to a long-term mobile home park owner — and whether your entity structure positions your heirs to capture it depends entirely on how the structure was designed.

This post covers the estate planning dimensions of MHP entity structure — what works, what to coordinate, and where the biggest planning opportunities exist.

The Revocable Living Trust as the Holding Vehicle

For most MHP owners with significant portfolio value, the revocable living trust is the foundational estate planning tool. A revocable living trust holds your assets during your lifetime, allows you to control and manage them as trustee, and passes them to your beneficiaries according to the trust terms at your death — without going through the probate process.

Probate matters for MHP owners because real property transfers at death that do not have a designated beneficiary or are not held in trust typically must go through the probate process in the state where the property is located. For a multi-state MHP portfolio, that could mean probate proceedings in every state where you own parks — an expensive, time-consuming process that delays your heirs’ access to assets and creates unnecessary legal costs.

A revocable living trust solves the probate problem. Title to your HoldCo LLC membership interests (and, where appropriate, the park-level LLC interests) is transferred to the trust during your lifetime. At death, the successor trustee distributes the interests according to the trust terms without probate involvement.

The tax impact of a revocable living trust during your lifetime: None. A revocable living trust is treated as a grantor trust for federal income tax purposes — it is completely disregarded. You continue to report all income and deductions on your individual return. The trust holding does not trigger any transfer tax, income tax, or change in the tax treatment of the LLC interests held in trust. It is a pure administrative structure, not a tax structure.

The Step-Up in Basis: The Most Important MHP Estate Planning Tool

The step-up in basis at death under IRC Section 1014 is the single most powerful estate planning tool for long-term MHP owners, and it interacts directly with the depreciation and cost segregation strategy.

Here is how it works: When a taxpayer dies owning appreciated property, the heirs receive that property with a new cost basis equal to the fair market value of the property on the date of death. The heirs’ basis is “stepped up” from the decedent’s low adjusted basis to the current fair market value.

For a mobile home park owner who has held a park for 20 years, taken accelerated depreciation through cost segregation, and accumulated a large amount of unrealized appreciation, the adjusted basis may be dramatically lower than the fair market value. Without a step-up, heirs who sell the park would face a massive taxable gain — including depreciation recapture at ordinary income rates under Sections 1245 and 1250, plus capital gains tax on the appreciation above original cost.

With the step-up, all of that accumulated gain — including every dollar of depreciation recapture — is simply eliminated. The heirs’ basis equals the fair market value at death. If they sell immediately after inheriting, there is little or no gain. The depreciation deductions the original owner took throughout their lifetime effectively provided a permanent tax benefit — taxes were deferred via depreciation and ultimately eliminated via the step-up.

This is the fundamental argument for aggressive depreciation strategies — including cost segregation — combined with a long-term hold and estate plan: you take the deductions now, you defer the tax, and at death, the recapture exposure disappears entirely. The time-value benefit of deferred taxes was enjoyed; the recapture was never paid.

How Entity Structure Affects the Step-Up

The step-up in basis is available for assets held directly or through pass-through entities — LLCs and partnerships. The ownership interests in your park-level LLCs, held by you or your trust, receive a step-up in basis at your death. The stepped-up basis flows through to the LLC’s inside basis through the Section 754 election mechanism.

This is another reason why the Section 754 election matters: when your heirs inherit your LLC interests and receive a step-up, the 754 election allows the LLC to adjust its inside basis to reflect the stepped-up value. Without the election, the inside basis — the basis of the LLC’s actual assets (the park, the improvements, the POHs) — remains at the historical cost basis even though the heirs’ outside basis has been stepped up. The basis mismatch can create timing differences and gains that should not exist economically.

A standing Section 754 election in each park-level LLC and the HoldCo ensures that the step-up at death translates into the correct inside basis adjustment, preserving the full economic benefit of the step-up for your heirs. Your MHP accountant must make and maintain this election correctly.

Gifting MHP Interests: Annual Exclusion and Lifetime Exemption

Transferring MHP entity interests to family members during your lifetime is an alternative to waiting for the step-up at death. The relevant tools are the annual gift tax exclusion and the lifetime gift and estate tax exemption.

The annual gift tax exclusion allows you to give a certain amount per recipient per year without using any lifetime exemption or incurring gift tax. For 2025 and indexed amounts thereafter, consult current IRS guidance, as the exclusion amount is adjusted for inflation. Gifts within the annual exclusion do not require a gift tax return.

The lifetime gift and estate tax exemption applies to gifts that exceed the annual exclusion. Under current law, the combined lifetime gift and estate tax exemption is substantial — consult your estate attorney for the current applicable exemption, as this figure has been subject to legislative changes and scheduled sunset provisions.

When gifting MHP LLC interests, there is an important caveat: gifts do not receive a step-up in basis. The recipient takes the donor’s carryover basis. If you gift an MHP interest to your child while you are alive, the child inherits your low adjusted basis — including all the accumulated depreciation and recapture exposure. If the child sells after receiving the gift, they owe the depreciation recapture you would have owed. The step-up at death is lost.

For assets with large embedded appreciation and depreciation, the step-up at death is frequently more valuable than a lifetime gift — even accounting for the estate tax that might apply at very high net worth levels. This is a nuanced comparison your estate attorney and MHP accountant should model for your specific situation.

Entity-Level Valuation Discounts

When MHP LLC interests are transferred — whether by gift or bequest — the value of those interests for gift and estate tax purposes is not necessarily the pro-rata share of the park’s fair market value. Minority interests in closely held LLCs may be subject to valuation discounts that reduce the taxable value of the transfer.

Two common discounts apply to minority LLC interests: the lack of control discount (reflecting the fact that a minority interest holder cannot force distributions, liquidations, or major decisions) and the lack of marketability discount (reflecting that there is no ready market for minority interests in private LLCs). These discounts are commonly claimed in family transfers of closely held business and real estate interests, and they have been litigated extensively in the Tax Court.

The use of entity-level valuation discounts is a sophisticated estate planning strategy that requires both a qualified business valuator to document the discount and an estate planning attorney to structure the transfer. The IRS scrutinizes these transactions carefully, and the structure must have genuine substance — not just be a tax reduction mechanism. This is a legitimate area of planning for the right MHP owner, but the advice belongs with a qualified estate planning attorney. The MHP Accountant® provides the tax structuring analysis and coordinates with your attorney; the legal advice is provided by counsel.

Coordinating Your Exit Plan With Your Estate Plan

The most sophisticated MHP estate planning involves integrating your exit strategy — when and how you will eventually stop operating — with your estate plan. The decisions are not independent.

If you plan to sell the portfolio during your lifetime, the depreciation recapture and capital gains from that sale will be income tax events. You will pay the recapture at ordinary income rates, the unrecaptured Section 1250 gain at up to 25%, and any additional appreciation at long-term capital gains rates. A 1031 exchange can defer these events, but if you ultimately want to convert to cash, the taxes will come due.

If you plan to hold the portfolio until death and leave it to heirs, the step-up eliminates the income tax exposure — but the estate may have estate tax exposure if the portfolio value exceeds the applicable exemption. The planning in this case focuses on reducing estate tax through the lifetime exemption, annual gifts, trust structures, and valuation discounts.

If you plan to transition management to the next generation while retaining economic interests — a common pattern for family-owned MHP portfolios — the entity structure needs to accommodate that transition. Separate classes of LLC membership interests can provide voting control to the current generation while transferring economic interests to heirs over time. An estate attorney must design this structure, with your MHP accountant implementing the tax mechanics.

For owners considering an exit in the near to medium term, the interaction between entity structure, depreciation recapture, and 1031 exchange is covered in our guide on cost segregation recapture at sale. For the entity structure architecture that supports all of this planning, see our HoldCo/OpCo structure post and our multi-park portfolio structure guide.

Frequently Asked Questions

Disclaimer: This post is for educational purposes only and does not constitute tax, legal, or financial advice. Estate planning decisions involve both tax and legal considerations — consult a qualified estate planning attorney and tax advisor before making any decisions. The MHP Accountant® is an enrolled agent firm; services do not include legal advice. Estate and gift tax law is subject to change and exemption amounts change periodically — verify current figures with your advisors.