1031 Exchange for a Mobile Home Park

Pads, utilities and roads exchange without question; each park-owned home needs its own answer

A mobile home park is mostly land improvements, and Treas. Reg. Section 1.1031(a)-3 names roads, paved areas, fences, telephone poles and outdoor lighting as inherently permanent structures, with a clubhouse or office as a building; underground water and sewer lines are analyzed under the same factors, and the regulation's Example 10 treats a water pipeline as real property under state law. The land-lease income stream is a leasehold interest, also real property, so a tenant-owned-home community exchanges almost dollar for dollar.

Park-owned homes are judged one at a time. Under paragraph (a)(6), a home that is real property under the law of the state where it sits on the transfer date is real property for section 1031; in California, a home installed on a foundation system under Health & Safety Code section 18551 is deemed a fixture and real property improvement once its registration is cancelled and a document is recorded.

A home that still carries its registration is analyzed under the regulation's affixation factors: how it is attached, whether it is designed to be removed, the damage removal would cause, anything suggesting the stay is not indefinite, and the time and expense of moving it. Homes on piers or blocks with hitches in storage are a facts-and-circumstances call to settle with your CPA before the contract fixes the price.

Split the contract three ways: the park, the homes and the chattel notes

Hypothetically, a $4,000,000 sale breaks into $3,400,000 for land and improvements, $400,000 for 20 park-owned homes and $200,000 of notes from homes you financed to residents. Only the $3,400,000, plus any homes that qualify as real property, is exchange property assigned to the qualified intermediary; the rest is a separate taxable sale even if it closes at the same table.

Notes are excluded outright: paragraph (a)(5) lists notes and other evidences of indebtedness as never real property regardless of state law. Homes you rented were depreciated as residential rental property over 27.5 years, the class Publication 527 applies to a mobile home, so gain on them up to that depreciation is unrecaptured section 1250 gain at a maximum 25% under Topic 409.

Homes you hold for resale to residents are inventory, taxed as ordinary income and never exchangeable. If the buyer also pays for a management business or brand, the Form 8594 allocation applies to the assets outside the exchange.

• Exchange column: land, pads, roads, utility lines, lighting, clubhouse, homes that are real property under state law
• Taxable column: registered homes, home inventory, chattel notes, deposits and prorations, maintenance equipment

Tenant-owned versus park-owned homes change the buyer, the price and your exchange math

A community where residents own their homes is priced on lot rent and matches the profile lenders and DST sponsors prefer; a park with dozens of rentals is priced partly as a housing operation, and buyers often value the homes at or below your depreciated basis. The higher the park-owned share, the smaller the portion of the price that can defer tax.

Two moves raise the exchangeable share before you list. Selling homes to residents converts rentals into lot-rent income and moves those dollars into the land-lease value, at the cost of tax on the home sales now; converting affixed homes to real property under your state's procedure, where the foundation work is economical, brings them inside the exchange.

• Tenant-owned community: lot rent only, close to 100% real property, the widest pool of buyers and lenders
• Mixed park: price each rental home in the contract and decide home by home whether it is real property
• Heavily park-owned: expect buyers to value homes at depreciated cost and to carve the notes out of the price

Rent-notice rules, closure law and private utilities set what a buyer pays and what a lender allows

Manufactured-housing law is state and local. In California the park must give 90 days' written notice before a space-rent increase under Civil Code section 798.30, and Government Code section 65863.7 requires an impact report with a relocation plan before a park is closed or converted, with in-place market value paid to residents who cannot find comparable housing. Buyers underwrite those constraints, and they explain why a park's value rests on continuing as a park.

Infrastructure is the other price lever: a private well, septic field, lagoon or package treatment plant is real property that exchanges, but it is also capital expenditure a lender will reserve for. Pull the utility permits, the rent-increase history and any local rent ordinance before pricing, and read the state rules for wherever the park sits. A park that could not be rebuilt as a park under today's zoning still exchanges, but the buyer's lender will want a zoning letter, so order one early.

Replacement paths: a stabilized park elsewhere, apartments, or DSTs that end the operating role

Like-kind covers all real estate, so the seller of a high-capex park can buy a newer community in another state, an apartment building, net-lease property or DST interests. A park-to-park move keeps you in the business with a better asset; a move to multifamily keeps the housing thesis with different tenants; a DST removes management altogether.

Whether a manufactured-housing DST is open when you sell depends on the offerings available in that window, so ask before you set the identification list rather than assuming one exists. The structure is described on traditional DSTs and the sector choice on choosing DST asset classes; under Rev. Rul. 2004-86 a DST trustee cannot sign new leases, which is why operating communities sit under a master lease inside a trust.

Using the hypothetical above, $3,400,000 of exchange proceeds could be identified as one $2,000,000 stabilized park and $1,400,000 across two DSTs, with the home and note proceeds taxed and kept as cash. Have your CPA or attorney confirm the home classification and the state notice rules before you price the deal.

Buying a mobile home park as replacement property: lot rents, park-owned homes and the utilities before day 45

A tenant-owned community is a lot-rent business, so the rent roll is the asset. Ask for lot rent against nearby parks, the increase history and the state or local notice rule that governs the next one, collections and delinquency by lot, and the count of occupied, vacant and unserviceable lots; in California, for example, Civil Code section 798.30 requires 90 days' written notice before a space-rent increase, and a local rent ordinance can cap what you may charge.

Park-owned homes need the same answer on the buy side as on the sale side. Under Reg. Section 1.1031(a)-3 a home is real property for the exchange only if it is real property under the law of the state where it sits on the closing date or passes the affixation factors, and notes are never real property, so exchange money spent on registered homes or on the seller's chattel notes is boot. Price them separately, pay for them with outside cash, and depreciate the rented homes as 27.5-year residential rental property as Publication 527 provides.

Infrastructure is where parks lose money. A private well, septic field, lagoon or package treatment plant exchanges as real property, but it also needs permits in good standing, a camera inspection of the sewer lines, a well test and a reserve a lender will require; ask for the utility permits, any notice of violation and the electrical pedestal ages, and order a Phase I. A park that could not be rebuilt as a park under current zoning still qualifies, but your lender will want a zoning letter, so request it the week you go under contract.

Sewer inspections and state notice rules take time, so run them during your sale's escrow rather than inside the 45 days. Reg. Section 1.1031(k)-1(c)(4) permits three identified properties whatever their value, and a signed written notice can revoke and replace an identification until the period ends, so name a backup. A manufactured housing DST keeps the lot-rent thesis without the septic calls, and the DST library explains the master lease that an operating community sits under inside a trust.