Depreciation Recapture When You Sell Your Mobile Home Park: What to Expect

You’ve spent years building your mobile home park into a cash-flowing asset. You’ve taken your depreciation deductions faithfully — cost segregation study commissioned, bonus depreciation elected, park-owned homes (POHs) written off as fast as the tax code allows. Now a buyer is on the line with an offer that could change your life.

Then your accountant mentions depreciation recapture.

For many MHP owners, this is the number that rewrites the deal. The tax bill on recaptured depreciation can easily run into six figures on a mid-size park, and if you don’t understand the mechanics before you sign a letter of intent, you’re negotiating blind. This post breaks down exactly how depreciation recapture works for mobile home park sellers — asset class by asset class, scenario by scenario.

What Depreciation Recapture Actually Is

The IRS gave you a tax benefit when you depreciated your park’s assets. Every dollar of depreciation reduced your taxable income in prior years. When you sell, the IRS wants some of that benefit back — that’s recapture.

But recapture isn’t a flat rule. How much you pay, and at what rate, depends entirely on which asset class the depreciation came from. Mobile home parks are uniquely complex here because they contain multiple asset classes with different recapture treatment.

The two governing code sections are Section 1245 (personal property and certain other depreciable property) and Section 1250 (real property). The rates are very different. Getting them confused is an expensive mistake.

Section 1245 Recapture: Park-Owned Homes and Equipment

Section 1245 covers personal property — assets that are not real property under the tax code. For MHP owners, the most significant Section 1245 assets are:

• Park-owned homes (POHs) — depreciated over 5 years under MACRS
• Vehicles, mowing equipment, maintenance trucks
• Office equipment and computers
• Certain land improvements reclassified to 5-year or 15-year property via cost segregation

The Section 1245 recapture rule is blunt: all accumulated depreciation on these assets is recaptured and taxed at ordinary income rates. Not capital gain rates. Ordinary income. In 2025, that means federal rates up to 37% for high-income sellers, plus applicable state income tax.

Here’s how the math works on a POH. You bought a park-owned home for $30,000. You depreciated it over 5 years, taking $6,000 per year. After 5 years it’s fully depreciated — adjusted basis of $0. You sell the park and allocate $25,000 of the purchase price to that POH. The entire $25,000 is Section 1245 recapture, taxed at ordinary income rates. Nothing about that gain is capital gain.

If you’ve done cost segregation and reclassified significant amounts to 5-year or 15-year personal property, those reclassified assets also carry Section 1245 recapture. More depreciation taken earlier means more recapture exposure at sale. The math is unavoidable — the IRS gave you accelerated deductions, and at sale, the accelerated portion comes back as ordinary income.

Section 1250 Recapture: The Land and Improvements

Section 1250 covers real property — the land, infrastructure, buildings, and land improvements that aren’t reclassified via cost segregation. For most MHP owners, this is the bulk of the depreciable basis: roads, utility hookups, sewer lines, and community structures depreciated over 27.5 years (residential) or 39 years (commercial/community buildings).

The Section 1250 recapture rules work differently than Section 1245. Under current law, straight-line depreciation on real property does not trigger ordinary income recapture. Instead, it creates what the tax code calls “unrecaptured Section 1250 gain.” This gain is still a capital gain — but it’s taxed at a maximum federal rate of 25%, not the 0%/15%/20% long-term capital gain rates that apply to other appreciation.

The unrecaptured Section 1250 gain equals the total straight-line depreciation taken on real property assets. Every year you depreciated that 39-year community building, you were building up unrecaptured Section 1250 gain. When you sell, that accumulated depreciation is taxed at up to 25% before any remaining appreciation gets the favorable long-term rate.

For a park you’ve owned for 10+ years with a significant depreciable real property basis, unrecaptured Section 1250 gain alone can represent hundreds of thousands of dollars in gain taxed at 25%.

How Cost Segregation Changes the Recapture Picture

Cost segregation is one of the most powerful tax strategies available to MHP owners during the hold period. By reclassifying assets from 39-year or 27.5-year property to 5-year, 7-year, or 15-year property, you accelerate depreciation deductions significantly.

But cost segregation doesn’t eliminate the recapture — it transforms it. Assets reclassified from real property to personal property shift from Section 1250 treatment to Section 1245 treatment. That means at sale, instead of paying 25% on unrecaptured Section 1250 gain, you pay ordinary income rates on Section 1245 recapture. For high-income sellers, that’s a worse outcome on the recapture itself, even though you benefited from the time value of money during the hold period.

The net benefit analysis of cost segregation always has to account for the future recapture cost. The answer is still usually positive — cash in hand today is worth more than tax deferred — but the exit tax implication is a real number that belongs in your planning spreadsheet.

How Gain Is Allocated at Sale

When you sell a mobile home park, the total gain doesn’t all get the same treatment. The purchase price is allocated across asset classes — typically through a purchase price allocation negotiated with the buyer (or imposed by IRS Form 8594 if you don’t agree). The allocation determines how much gain falls into each recapture bucket.

Asset classes in a typical MHP sale:

• Land: No depreciation, no recapture. All gain is long-term capital gain.
• Section 1245 personal property (POHs, equipment): Gain up to accumulated depreciation = Section 1245 ordinary income recapture. Gain above original cost = long-term capital gain.
• Section 1250 real property (infrastructure, community buildings): Gain up to accumulated depreciation = unrecaptured Section 1250 gain (max 25% federal). Gain above original cost = long-term capital gain.

The buyer wants a high allocation to land (no recapture for you, but also no depreciation basis for them going forward). You often want a lower land allocation and higher building allocation depending on your specific depreciation history. The allocation negotiation has real tax dollars on both sides of the table.

Comparison Table: Taxable Sale vs 1031 Exchange vs Death (Estate Step-Up)

The 1031 Exchange: Deferral, Not Elimination

A 1031 exchange lets you defer all of the gain — including recapture — by reinvesting your proceeds into like-kind replacement property. You don’t recognize Section 1245 recapture or unrecaptured Section 1250 gain in the year of sale. The entire embedded gain carries forward in the form of a lower basis in the replacement property.

This is powerful, but it’s important to understand what you’re carrying. When you do a 1031 exchange out of a park with significant cost segregation and bonus depreciation history, you carry that entire recapture obligation into your replacement property. The ticking clock doesn’t stop — it just resets to a new asset. Every year you hold the replacement property and continue depreciating, you’re adding to a recapture pile that will eventually be recognized when you sell without another exchange.

Some MHP owners cascade 1031 exchanges throughout their lifetime and never pay the recapture tax. That’s a legitimate strategy. But it requires discipline, a qualified intermediary on every sale, strict compliance with identification and closing deadlines, and a commitment to always reinvesting in qualifying property.

For more on 1031 strategy for MHP owners, see our post on DSTs as a 1031 exit option and our comparison of installment sales versus lump sum exits.

The Estate Step-Up: The Ultimate Recapture Elimination

Under IRC §1014, when a taxpayer dies and passes appreciated property to heirs, the heirs receive a “stepped-up” basis equal to the fair market value of the property at the date of death. All accumulated depreciation recapture — Section 1245 and Section 1250 — is permanently eliminated for income tax purposes.

If you’ve built up $2 million in accumulated depreciation on your mobile home park over 25 years, and you die while still owning it, that $2 million of embedded recapture obligation disappears. Your heirs inherit the park with a basis equal to its current fair market value and can sell it immediately with no income tax recapture.

This is why “hold until death” is a genuine strategy for some MHP owners — particularly those who don’t need liquidity and have heirs who can manage or sell the park. The tax savings can be enormous. However, it requires coordinating income tax planning with estate tax planning, since large parks may be subject to federal estate tax above the applicable exemption threshold.

Reporting Recapture: Forms 4797 and Schedule D

Depreciation recapture on a mobile home park sale is reported on IRS Form 4797 (Sales of Business Property). Section 1245 recapture is reported in Part II of Form 4797 and flows to ordinary income on your return. Unrecaptured Section 1250 gain is calculated on the Section 1250 Unrecaptured Gain Worksheet and reported on Schedule D at the 25% maximum rate.

Your depreciation schedules — maintained on Form 4562 each year — are the source documents for recapture calculations. If your books have been maintained properly, your CPA can calculate recapture to the dollar well before closing. If your records are disorganized, reconstructing depreciation history at sale is expensive and error-prone. That’s one of the strongest arguments for cleaning up your books well before listing.

FAQ

For further reading on IRS rules governing depreciation recapture, see IRS Publication 544: Sales and Other Dispositions of Assets.

Internal links: Installment Sale vs Lump Sum for MHP Sellers | DSTs as a 1031 Exit Option | How to Clean Up Your Books Before Listing

Disclaimer: This post is for educational and informational 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 regarding the sale of your mobile home park or any other tax matter. The MHP Accountant® is an enrolled agent firm; engagement of professional services is required for personalized advice.