The #1 Reason You’re Paying Too Much in Taxes
Campgrounds are commercial properties that are usually depreciated over a 39-year schedule on straight-line depreciation. You have options. The accelerated options are very lucrative from a tax and cash-flow perspective. Excluding land, the tax benefits on most of the additional value of your purchase can be accelerated to your first year of ownership or 5-year or 15-year accelerated schedules. The difference depends on the IRS’ laws and regulations in the year of your purchase. When identified and valued, you have a large tax benefit that is likely being missed. This is true if you just purchased the park or if you have owned it for years.
Don’t Fire Your CPA/Tax Professional!
Before you fire your CPA/tax professional, realize that this is a special niche of tax law focused on investment properties. It is not taught at the university level. The demand for CPAs is enormous due to a shortage of those coming out of school with accounting degrees and engineering and construction are rarely if ever in their skill sets. Two other issues come to mind: risk of audit if they try, lower benefits, and their distaste for doing 3115 Change of Accounting Form required by the IRS if a property has been previously depreciated using a straight-line method. The best option for you and your tax professional is outsourcing this to an engineering-based firm that specializes in real estate tax benefits for commercial and residential investments, works closely with you and your chosen tax professional and offers audit defense at no additional cost. Some companies include 3115 Change of Accounting Forms as well when needed. It is your money, keep more of it!
At the OHI’s OHCE2023 we showed examples of two RV Parks and a trailer park:
Example #1: Owner purchased land and built an RV Resort Park from the ground up with a total cost, minus land, of $10 Million. Because this park was finalized in 2022 and open for business, the Bonus Depreciation gave him $9 Million in tax benefits the first year and an after-tax cash flow of about $3.5 Million in deferred taxes he did not have to pay at his 37% tax rate in the first year of operation.
Example #2: Owner purchased an existing RV Park for $425K and added improvements worth another $200K. Once land value was deducted, the balance that qualified for 100% Bonus first year of study depreciation was $$480K. This gave him $240K in tax benefits the first year and at his lower tax rate of 22%. This represented $45K in federal and state taxes he did not have to pay.
Example #3: Mobile Home Park with 13 trailers with a depreciable cost (without land) of $850K. No improvements were made at the time of the study. Her first year Bonus Depreciable tax benefits were $375K and gave her $186,012 in taxes that did not have to be paid for as long as she owned the property. That was cash-flow that she was able to put back into upgrading the park and by leveraging that additional cash-flow, she received more to depreciate or expense in the following year(s).
Campground Industry Opportunity:
The campground industry’s expected growth rate is to compound annually by 4.9% from 2021 to 2028. Forbes in March 2023 has reported that RV Parks are growing in size and amenities to meet the growing demand. Most of those added amenities can be added with more tax benefits if you and your tax professional are working closely with a knowledgeable engineering-based tax consulting company. The demand is increasing for EV charging and resort-type amenities. Stop paying more in taxes than you need to pay!
The 100% Bonus Depreciation is dropping for 2023 purchases to 80%, 2024 to 60%, and 2025 to 50%. Remember, your bonus is based on the year of purchase and occupancy (open for business), not the year the study is done. Right now, the Senate is dragging their feet on extending the 100% Bonus Depreciation to purchases made during 2023, 2024 and 2025. It has passed overwhelmingly by both Democrats and Republication in the House. If you purchased your property and put it in service between October 2017 and December 31, 2022, you will have 100% Bonus Depreciation available. And, maybe, yet this year, that will be extended to purchases in 2023, 2024 and 2025. Upgrades to your property since purchase are likely to also be depreciable on an accelerated basis or expensed up-front.
A cost segregation study will define what is 5-year, 15-year and what and how much is available for Bonus Depreciation. It makes your tax filing easier going forward for you and your tax professional. Your best course of action for the optimum tax benefit is to get a no-cost pre-analysis on your property and then determine how that fits your specific tax situation and goals for your property. The RV Park industry is growing at a rapid pace. The opportunity to leverage that demand in your favor is up to you.
