The Ultimate Guide to RV Park Depreciation and Tax Benefits

Understanding depreciation is key for any real estate investor, especially when investing in RV parks.

Depreciation is a significant benefit that can substantially impact your tax situation.

In this article, we’ll cover the basics and take a deep dive into Cost Segregation and Bonus Depreciation.

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Depreciation Overview

When you purchase an RV park, you can’t depreciate the land itself, as land doesn’t deteriorate like physical assets.

However, the IRS allows you to depreciate other parts of the property, like roads, fences, and sidewalks, which do wear out over time. This depreciation reduces your taxable income.

The default depreciation schedule for residential real estate is 27.5 years, but individual components of an RV park may have shorter useful lives and can be depreciated more quickly.

Depreciation Schedules

Personal Property

Items like furniture and equipment are depreciated over 5 years. This means you can deduct 20% of their value each year.

Land Improvements

Features like asphalt and landscaping typically have a 15-year depreciation schedule.

Interior Fixtures

Items such as plumbing and lighting fixtures are usually depreciated over 7 years.

Cost Segregation

To accelerate depreciation, you can conduct a Cost Segregation analysis. (Here is who we use for all of our cost seg studies)

This involves a third-party evaluation of the individual components of your property.

Instead of depreciating the property as a whole, the report will break down each part, allowing you to use shorter depreciation schedules.

Example Calculation

Let’s say you buy an RV park for $5 million. After a Cost Segregation analysis, you determine the following values:

• Land Value: $1.5 million (not depreciable)
• Improvements and Other Assets: $3.5 million (depreciable)

Without Cost Segregation, you would depreciate the $3.5 million over 27.5 years, resulting in an annual depreciation of about $127,273.

But with Cost Segregation, the breakdown might look like this:

• $2,000,000 in land improvements (15-year schedule)
• $300,000 in interior fixtures (7-year schedule)
• $200,000 in personal property (5-year schedule)
• $1,000,000 in other residential property (27.5-year schedule)

In the first year, this increases your depreciation to approximately $260,000, significantly reducing your taxable income.

Want to learn more about Cost Segregation? Check out this video:

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Bonus Depreciation

Bonus Depreciation allows you to accelerate depreciation further. As of 2023, you can take 80% of the depreciation (60% in 2024) on assets with a useful life of 15 years or less in the first year.

This percentage will decrease annually until it phases out in 2027.

Using our example, with $2.5 million in assets qualifying for Bonus Depreciation, you could take 80% of that in the first year, resulting in a $2 million deduction. How bout them apples?

Recapture and Long-Term Strategies

Remember, depreciation isn’t free money. You’ll face depreciation recapture taxes at a 25% rate when you sell the park.

However, this is often lower than your ordinary income tax rate.

Additionally, strategies like 1031 Exchanges or long-term property holding can help mitigate these taxes.

If you don’t have a great CPA group like mine (check them out [HERE]), make sure you find one to assist you with strategies like those discussed in this article.

Conclusion

Depreciation is a powerful tool for RV park investors. It can significantly reduce your taxable income, especially when combined with Cost Segregation and Bonus Depreciation.

Always consult with a CPA to navigate these advanced tax strategies effectively.

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