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Bonus Depreciation

Exclusively with the 5x Tiny-Home™

Overview

This is an opportunity to acquire an income-producing “tiny home” for a guaranteed 85% return due to the home’s eligibility for “bonus depreciation.”

Summary

Due to its unique designation as personal property, the 5x Tiny-Home™ by BoxHouse qualifies for bonus depreciation as defined under Internal Revenue Code sections 179 and 168(k). 1 A taxpayer puts a one-time $60,000 down payment toward the purchase of a tiny home subject to a cash-flow buyout lease with a remaining $240,000 per unit payable out of future cash flows. Under current depreciation rules, the taxpayer receives a first-year bonus depreciation deduction of 80% of the asset’s basis, with the remaining purchase price deductible over the next four years for a total 5x deduction ratio.

Let’s look at the process of the transaction.

1

One-Time Down Payment

With a one-time down payment of $60,000, the taxpayer acquires ownership of a 5x Tiny-Home™ by BoxHouse valued at $300,000.
2

Lease Agreement

The acquisition comes with a lease in place to a qualified lessee who places end users into the homes. The lessee agrees to pay the remaining $240,000 owed under the financing terms due in a balloon payment in 30 years.
3

End of Depreciation Period

Once the taxpayer has used all the depreciation from the 5x Tiny-Home™, the taxpayer may donate the house to charity in exchange for a fair market value donation thereby offsetting any potential recapture event.

BoxHouse manufactures and sells the 5x Tiny-Home™ on payment terms described above and keeps a security interest until final payment is made.

Why this works.

The amount of bonus depreciation available in 2023 is 80% of the basis of the asset placed into service in 2023.2 While real estate is not eligible for the five-year bonus depreciation, revenue rulings have concluded that when a structure is movable (such as with a wheeled trailer), it is depreciable as personal property.3 These tiny homes are delivered on wheels, can be readily transported, and are therefore considered personal property, not real estate.

Bonus Depreciation

Internal Revenue Code Section 179 and 168(k) allows an additional first-year depreciation deduction equal to the applicable percentage of the adjusted basis of qualifying property placed in service during the tax year.4

The remaining basis of the property depreciates over the ensuing four years, as follows:

80

2023

5

2024

5

2025

5

2026

5

2027

The value of the tiny home, subject to the note receivable, constitutes the depreciable basis.5 The full face value of the note counts as its basis. It does not need to be discounted to the present value.6

Bonus depreciation is not limited to your taxable income. You can deduct any bonus depreciation amount, and if the deduction creates a net operating loss, you can carry that amount forward to any unused loss to deduct against future income.

Bonus depreciation can be claimed for assets used in rental activities and other passive activities, as well as in a trade or business.

Eligible Property

Generally, bonus depreciation applies to capital assets that are purchased, not to assets contributed into a partnership.7 The property purchased by the taxpayer includes the BoxHouse and the lease which cannot be legally separated from each other as the lease represents a “security interest” in the tiny home.8

Tax Benefit Example

How This Compares to Similar Business Opportunities

Average Values of Hotel Acquisitions

on a Per-Door Basis

The acquisition price for a hotel on a per-room basis ranges from approximately $100,000 for a super-budget motel to $1,000,000 per door for a luxury hotel. The average acquisition price for a hotel on a per-room basis for Q2 2021 and Q2 2022 was $294,000.9 Notably, unlike a hotel, our tiny home comes with a full kitchen, washer/dryer, and a generous living area, along with a fixed income stream, no shared walls, and is not subject to daily vacancies. All these factors further validate their reasonable value.

Below are average per-room hotel construction costs.10

221,000

3 Star Hotel

318,000

4 Star Hotel

604,000

5 Star Hotel

Finally, below are some average Airbnb occupancy and rental rates

suggesting the attractive opportunity that a no-money-down 5x Tiny-Home™ may represent for many opportunity seekers.

Average Daily Rates (ADRs):

Economic pressures and inflation-weary consumers will lead to small ADR gains of 1.7% in 2023.

RevPAR:

Small ADR gains won’t be enough to offset occupancy losses, and RevPAR will experience a small decrease in 2023 of -1.6%.

The 5x Tiny-Home™

Measuring 19 feet by 20 feet, or approximately 380 square feet, the 5x Tiny-Home™ is designed to provide privacy and comfort by including a full kitchen, bathroom, bedroom, dining & living area. Constructed with a steel frame and walls, the 5x Tiny-Home™ is designed to endure significantly longer than conventional stick-built houses due to its reduced susceptibility to severe weather conditions, mold, rot, etc.

Where are the tiny homes installed?

The majority of homes are currently being installed in West Texas.

Why West Texas? Housing has been a major challenge for oil companies to secure in rural areas. The typical living situation for an oil field worker includes numerous employees sharing small confined spaces referred to as “Man Camps.”  Companies in West Texas are seeing the value in providing premium housing for their employees where the alternative is an unappealing “man camp” that struggles to recruit and retain valuable employees. As evidenced by the photos below, West Texas companies have been able to utilize the 5x Tiny-Home™ to set themselves apart from others by providing far more appealing living accommodations.

Typical “Man Camps”

Below are photos of compounds within proximity as compared to BoxHouse.

Frequently Asked Questions

Who is responsible for vacancy, loss, or damage?

The lessee is responsible to carry the insurance and pay the monthly buyout rent regardless of the condition or occupancy of the unit.

Who are the lessees and why do they want a 5x Tiny-Home™?

The lessees are real estate owners, business opportunity seekers, and oil service companies who are excited to acquire a tiny home with no money down on very favorable long-term financing terms. BoxHouse procures these individuals and sells the tiny homes exclusively subject to the leases. The leases are part of the purchase price of the BoxHouse (just like a hotel is sold on a per-door basis, i.e., a structure plus its associated cash flow).

What are the total cash outlays?

The outlay is a one-time down payment of $60,000 with the remainder of the purchase collected directly from the lessee.

How do I get started?

We will send you a purchase order and financing agreement, which you will sign and forward along with the one-time payment to our attorney’s escrow account. The funds will be used for our next bulk delivery order.

Is this a security?

No. This is not a pooling of interest, nor is it passively managed off the efforts of others with the intent to generate a profit. You own the unit(s) directly and you have full control and discretion over how to continue managing the lease buyout arrangement with your lessee. We simply provide the package upfront and maintain a collateral assignment of the rents until we are paid in full.

Who “owns” the 5x Tiny-Home™?

The Taxpayer “owns” the 5x Tiny-Home. However, at the end of the taxpayer’s bonus depreciation period, the taxpayer can donate the BoxHouse along with the favorable financing terms and the associate lease to a qualified charity thereby offsetting any recapture amounts from divesting of the BoxHouse prior to it being fully paid off.

References

2 – Basis is the amount of your capital investment in property for tax purposes. Use your basis to figure depreciation, amortization, depletion, casualty losses, and any gain or loss on the sale, exchange, or other disposition of the property. The basis of an asset is its cost to you. The cost is the amount you pay for it in cash, debt obligations, and other property or services. See https://www.irs.gov/taxtopics/tc703#:~:text=Basis%20is%20generally%20the%20amount,is%20its%20cost%20to%20you and The Story of Basis https://www.thetaxadviser.com/issues/2010/jun/sullivan-jun10.html

4 – Bonus depreciation is an another category for deductions in addition to Section 179 deductions. If an asset qualifies as a long-term business property under tax rules, bonus depreciation may allow a business owner to deduct the cost of that asset more efficiently. Bonus depreciation is not subject to any annual limit, and the property does not need to be used in the business at least 51% of the time, as with a Section 179 property. The tax rules instead require the business owner to place the property in service in the year in which they are seeking a deduction for it. Bonus depreciation initially was set to gradually decline until 2020, when it was scheduled to be eliminated entirely. However, the Tax Cuts and Jobs Act altered this plan. It also extended bonus depreciation to the purchase of used property, whereas it previously had applied only to purchases of new property. For an asset that is placed in service after December 31, 2022 and before January 1, 2024, the first-year bonus depreciation amount is set at 80%.

5 – Borrowed cash is full basis, untaxed money in the borrower’s hands. These funds may be used to purchase assets with a full cost basis that enables the financier to earn profits and suffer losses in operating or disposing of the assets. If the debt is genuine and reasonable in terms of the fair market value of the purchased property, the full amount of borrowed funds generally gives rise to cost basis. See: https://www.thetaxadviser.com/issues/2010/jun/sullivan-jun10.html

6 – There is no need to discount a note receivable to the present value when determining tax basis. See Peracchi, Donald J. et ux v. Commissioner where a 10-year note at 11% interest was held to contribute the full face value to the calculation of basis: https://www.taxnotes.com/research/federal/court-documents/court-opinions-and-orders/contribution-of-unsecured-promissory-note-increased-shareholder%27s-basis%3B-dissent-sees/1lz9n

7 – Property contributed to a partnership is not eligible for bonus depreciation, whether or not the tax basis of the property equals the property’s fair market value. It was thought that bonus depreciation might apply to the spread between value and basis of contributed property if the partnership applied the “remedial allocation method” to mitigate the effects of the “ceiling rule.” Remedial allocations are notional items on the contributed property determined as if that property were acquired by the partnership. However, constructively acquiring the property for remedial allocation purposes does not change the fact that the property was actually contributed to the partnership. So, there is no bonus depreciation on account of remedial allocations.

8 – See Uniform Commercial Code §1-203. Lease Distinguished from Security Interest.

9 – Whether a transaction in the form of a lease creates a lease or security interest is determined by the facts of each case.

10 – A transaction in the form of a lease creates a security interest if the consideration that the lessee is to pay the lessor for the right to possession and use of the goods is an obligation for the term of the lease and is not subject to termination by the lessee, and: (1) the original term of the lease is equal to or greater than the remaining economic life of the goods; (2) the lessee is bound to renew the lease for the remaining economic life of the goods or is bound to become the owner of the goods; (3) the lessee has an option to renew the lease for the remaining economic life of the goods for no additional consideration or for nominal additional consideration upon compliance with the lease agreement; or (4) the lessee has an option to become the owner of the goods for no additional consideration or for nominal additional consideration upon compliance with the lease agreement.

11 – The LWHA Q2 2022 Major U.S. Hotel Sales Survey includes 133 single-asset sale transactions over $10 million which totaled ~$5.3 billion and included ~21,200 hotel rooms with an average sale price per room of $248,000. By comparison, the LWHA Q2 2021 Major U.S. Hotel Sales Survey included 60 single-asset sale transactions over $10 million which totaled $4.7 billion and included ~14,000 hotel rooms with an average sale price per room of $331,000. https://lwhospitalityadvisors.com/wp-content/uploads/2022/11/Q3-2022-Sales.pdf

13 – This is based on our suggested use/exit. As the direct owner and manager of this equipment, the financier can modify the program to include renegotiating the buyout lease or any other element of the program. Nothing herein is intended to constitute a security nor to suggest that the financier is in any way a passive party to the transaction. Each transaction is entered into on a stand-alone basis and there is no pooling arrangement.

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(435) 772-9764