Tax Question...

[palomar]

wondered if anyone here in same boat could point me in right direction

i bought a sailboat last year. keep it in the BVI's with a charter company.

i'm trying to decide what my options are as far as benefitnng me best on my income taxes.

i was trying to use turbotax and do it myself.. but looks like a tax pro might be a much better option.

the boat lost money in 2011.. shocking i know.
it lost about 10k operating expenses vs revenue.

im likely going to sell it in 2012. at which point it will also have additional depreciation and a brokers fee.

there is also about 5k a year in interest on a boat loan.

-im wondering if i can list it as a business and write the majority off against my income taxes from my main job.
-turbo tax rep suggested listing it as a rental property. -but can only take a passive deduction. -only against the profits. which there are none.
or just say heck with it.. call it my 2nd house and take the interest deduction and eat the rest.

certainly someone else has gone down this path before me...
any suggestions?

thanks.

[sailingfool]

You will likely get a 1099 from the charter company which will complicate any effort to call the vessel a second home. The legal thing to do is would be to treat it as rental property as the TT rep suggests, so you dont have to pay income taxes on the rental income.

If you dont get a 1099, you could look closely at the second home provisions to see if that has a shot...but it wont be legal for sure...

[Dfok]

No tax advantaged BVI yacht here, I just have plastic classic on the Chesapeake. Tax abatement is the space between the counter and the door when the hardware guy says "you owe me six cents for the governor".
Pardon my incredulity but please, give me a break. You buy ownership in a boat in the BVI and you come to the sailnet forum for tax advice?

[travlineasy]

If you purchased the boat with hopes of generating revenue and set everything up as either a sole proprietor or sub-chapter-S corporation, then under Schedule-C (Profit or loss from a small business) you could actually find some tax breaks. However, without that 1099 and lots of paper trails you would really be pushing your luck.

Gary

[TMain]

I am fairly new to sailing and my wife and I have joined a sailing charter club until we decide if we want to buy a boat or not. I am very interested in purchasing a yacht and renting it inorder to gain the tax advantage. I know people are reluctant to talk about such things often but has anyone had any problems with this if it is structured correctly by a professional accountant? Also does anyone know the depreciation time period for a sailboat? Such as motor vehicles etc etc being depreciated over so many years.
Thanks for any experiences.

[Geoff54]

I am not a tax expert but I do know a little about rental property and I did do a little research when I was considering buying a boat to put in charter - I ultimately decided that it wasn’t worth it. There is a lot of misinformation out there – much of it based on shaky interpretations of tax law by people who want you to buy a boat to put in charter. Having said that, here are some key points that I believe to be correct but I do not guarantee it.

You can offset the income against the cost of generating that income. You have to apportion total costs between rental costs and personal use costs. This isn't as obvious as it at first appears and you should get advise.

As far as losses are concerned:-

If you used it for more that 14 days (or more that 10% of the rental days) in the year, it is not a rental property and you can’t deduct losses as such.

Even if you can treat it as a rental property, there is an AGI limit (I think it is currently $150,000) above which you cannot claim a loss from rental property against other income such as salary and investment income.

If you want to treat it as a business you have to prove a “for profit” motive. This is pretty hard to do when you didn't set it up as a business, are making a loss, using the asset for your person pleasure, paying someone else manage and maintain everything for you. You get the idea. It looks like you are trying to treat a hobby as a business and are trying to gain a tax advantage by doing so. Quite frankly, it sounds like you are, otherwise you would have had your “business” properly set up in the first place, before you realized that it was costing you so much. And I believe that that’s the way it will be viewed. Can you spell “audit”?

You might be able to treat it as a second home but the tax advantages are pretty much limited to claiming your interest.

You REALLY, REALLY need an independent tax accountant who understands the issues. If you have any doubts about the legitimacy of what you are doing, get a tax ruling. It will be less expensive in the long run.

[-OvO-]

This is me getting off-topic, but does it strike anyone else as bizarre that taxation should depend on the individuals state of mind?

[Minnewaska]

Did a tax professional set this up for you in the first place? Often they don't and people try to jam it into their returns with a home software app, without knowing the long term I plications. Worse, there are dealers that sell boats with this scam. While they may be legit tax positions, they often leave out the whole story. Such as, with a boat in a bussiness, you may have no choice but to depreciate it and take that deduction. Now deductions always sound good, but in the case of depreciation you also lower the basis (or your theoretical purchase price) each time you take a depreciation deduction. That means that when you sell it, you will likely have a huge gain that you will have to pay taxes on.

This is only a random anecdote to point out the need for a dispassionate accountant to review the situation and be sure you are aware of all issues, both today and down the road.

Many are uncomfortable fessing up to what they did, but trust me, that's nothing like the discomfort of an audit.

[estopa]

I think you are screwed by not setting it up as a business. If you setup an LLC and bought the boat under the LLC you may have some case but again like others posted you will need that paper trail. You will for sure need a Tax accountant to look at your whole picture before proceeding to the next step on this.

BTW, why aren't you keeping the boat? I thought the whole reason for chartering a boat was to recoup some of the cost of ownership for a few years then take possession of the boat without too much out of pocket costs. Am I wrong?

[denverd0n]

Originally Posted by TMain

I know people are reluctant to talk about such things often but...

I don't think anyone is reluctant to talk about it. Most people simply don't buy their boats for these purposes, and so they don't have much to say on the matter.

All I would say is that, if you aren't sure about the tax laws then the only smart thing to do is hire someone who is. The tax advice you get on a public internet forum is worth exactly what you pay for it... NOTHING!