Welcome back FatCats; today’s story is a lot of fun.
Thanks to my good friend Michael (see A Canadian In Panama), I’m in the market for a boat. And for the next few minutes, so are you.
First, we have to make some tough decisions:
Catamaran or Mono-Hull?
We could get lost in that conversation forever… the only real long-term solution is to have one of each––but where to begin?
Personally, I’m partial to the sailing catamaran…
Hard to say no to that. Sailing Catamaran it is. But which brand?
Or maybe something a bit more…French? This is the new 67’ Foutaine Pajot.
Definitely worse boats on the free market. And if you decide to start a little smaller, no problem; they make them as small as 40 feet.
Now that the hard part’s over, what’s the process of purchasing a yacht exactly?
I reached out to a FatCat yacht owner, who connected me with a guy named Frank; he’s been dealing in luxury yachts longer than I’ve been alive. The average boat Frank sells runs 750k, and last year he sold 34 of them.
For the record, neither I nor FatCatInvest.com has any affiliation or monetary arrangement with Mr. Frank McCarthy, Atlantic Cruising Yachts, or Fontaine Pajot…we just like their boats.
Frank’s an accomplished sailor, competition racer, the whole deal, “I came into the industry as a boater, a sailor, as an owner––that’s my background…I love boats and boating, anything to be on the water.”
“With the number of boats you’ve sold,” I ask, “I imagine you see the same situations over and over again with clients––the same problems, same misconceptions––what advice do you have for first-time yacht owners?”
“The number one thing we see everywhere we go is the misconception that you need to be a multi-millionaire to have one of our boats. Most people assume they don’t make enough money to buy a yacht, but in fact, a typical buyer these days makes around $300k/year.”
“Especially since the new tax code passed,” he continues, “People are discovering that––with new even more lucrative tax incentives––yachts are now affordable, advisable from a tax-planning perspective, and with the correct structure…can be purchased with very little––even zero––out of pocket costs.”
“Really? So what, you have a whole class of people waking up then, to an industry they thought was closed to them?”
“Exactly. These days, we don’t even talk about boats in the boat business. I’d say 85% of my time with client’s now centers around one thing: taxes.”
Frank walks me through leveraging tax efficiencies, net operating losses, reasonable expectations of profit, above the line income reductions…. Frank’s company is really part boat dealer, part tax-planning––it’s super smart, and the numbers I’m hearing are hard to believe. One thing is clear: the government really wants you to buy a yacht.
Not surprisingly, Frank has his own in-house Tax Advisor/Planner/Consultant, whose job is to educate your accountant on the latest yacht loopholes and how to use them.
Even better, he’ll also serve as the CFO of the new boat company you’ll be setting up, adding a layer of legitimacy to the business.
So how does this work, how is it structured? The big picture is actually pretty straight forward and logical.
When the IRS considers you and your boat for the first time, the tax rules/incentives available to you depend on how Uncle Sam classifies your situation/relationship to the boat. Possible classifications include:
- A private individual who purchased a yacht as a recreational purchase. (No Major Tax Advantages)
- Your recently formed corporation, BoatLife LLC, owns the boat. You own BoatLife LLC, but your role in the everyday management and everyday activity of the company appears minimal––so the government classifies your relationship to the company as PASSIVE. (Limited Tax Advantages)
- Your recently formed corporation, BoatLife LLC, owns the boat. You own BoatLife LLC. Your interaction with the company, as well as the time you spend on the boat, has been properly structured and documented, therefore the government classifies your relationship to the company as ACTIVE. (Major Tax Advantages)
Option 3 is the foundation for your strategy, within this structure.
-You started BoatLife LLC, a company which has a reasonable expectation of eventually generating a profit, through chartering and marketing activities.
–BoatLife LLC purchased a major piece of business equipment––a yacht––necessary for the operation of the business.
-You are running/managing the company day to day (ACTIVE), as opposed to just being an investor or silent partner (PASSIVE). You document your activity with the company and your time on the boat, so as to keep and maintain an ACTIVE status in the eyes of the government.
Within that structure, the boat isn’t a pleasure craft, but rather a necessary business expense, no different from buying a machine in a factory, or any other necessary infrastructure.
With the boat as a business expense, you gain tax advantages in the form of depreciation. Operating within the structure of IRS tax code section 168, BoatLIfe LLC will generate a k1 form (similar to a 1099), which allows you to show a massive loss (due to purchase cost of yacht, via depreciation).
Using the k1 form as an above the line reduction in income, you unlock the Net Operating Loss components of the tax code––the components that allow us to pay for our yacht with the governments money instead of our own.
To simplify, remember that the government only taxes a company’s profit. If a company breaks even or loses money, it pays no tax.
The same is true for individuals; if you are unemployed or make less than a certain amount per year, you pay no tax.
For individuals with multiple sources of income, the government calculates the sum of all sources to determine your total annual income, then they tax that number.
For certain companies (and the people that own them), losses are added in the same way, and count against income.
For example, Jonny made $1000 last year from his job working at the grocery store. But Johnny also owns a t-shirt company, and that company made a loss of $700 last year. Johnny’s final income then is $300, which is taxed at 30%, so Johnny pays the government $90 and is left with $210 net.
All normal so far.
But what if Johnny’s business loses more than his job makes? If he made $1000 from his job but his company lost $1500, his final income would be a negative number, -$500.
Since he made less than zero he wouldn’t be charged any tax, but what about the following year?
And this is the key to free boats and jets. In certain situations, that negative number––called a Net Operating Loss–– can be carried over to the next year, and count against any future income.
Suppose in year 2 Johnny makes $500 from his job, and the t-shirt company breaks even. His $500 in earnings is combined with his -$500 loss from the previous year, and officially his income is Zero, so no taxes are collected.
And if he had a really, really big loss, then the loss would be rolled over year after year, reducing Johnny’s taxable income each time.
This is exactly what Trump did in 1995, when he declared a total loss of $916 million. Because of the size of the loss, he wouldn’t have to pay any taxes for many years, as the next $916 million he earned would be tax free, offset by the original loss.
And this is exactly how we will use BoatLife LLC to reduce otherwise taxable income. Last year the rules allowed BoatLIfe LLC to write off 50% of the purchase price of the boat as a loss (via depreciation.)
Under the new tax plan passed in December, BoatLife LLC can now consider the full purchase price of the boat––100%––as a loss, through depreciation!
And it gets better. Using “accelerated depreciation,” the entirety of the loss––the full cost of the boat––can be declared as a loss immediately and in full.
In other words, buying a million-dollar boat makes the next million you earn in income tax free.
As an example, Zelda is ready to pull the trigger on this 42-footer with 4 beds and 5 baths, listing for just over half a million USD.
These are the terms of the purchase, typical for the industry.
So total cost to own this boat, including loan payments, is $56,757 yearly, or $4,730/month, which can be considered as a business expense/loss against income as well.
In year 1, the tax code gives Zelda the option, through accelerated depreciation, to claim a loss of $581,757 (Boat price+ annual costs).
If Zelda earns 200k a year and is taxed at 35%, her normal tax bill is $70,000/year. Using our yacht tax advantages and accelerated depreciation, the next 3 years for Zelda look like this:
Year 1: $200k income + loss of -$581,757 = zero taxable income, loss of -$381,757 carried over to next year. Annual tax savings: $70k
Year 2: $200k income + loss of -$381,757 = zero taxable income + loss of -$181,757 carried over to next year. Annual tax savings: $70k. Cumulative tax Savings: $140k
Year 3: $200k income + loss of -$181,757= $18,243 in taxable income for the year, Annual tax savings: $63,615k. Cumulative tax savings: $203,615
The $203,615 that Zelda normally would have paid to the government as tax has instead gone to pay the loan on her yacht. She has effectively converted her tax bill into yacht equity. Go Zelda.
The result? Payments and tax savings combined, Zelda’s half-million dollar yacht is 70% paid for, after just 36 months!
And while that’s great news, we still have the problem of 57k/year in bills just to keep her in the water. That’s pretty steep next to an income of $200k, just $130k after tax.
Which brings us to the second component of our strategy––
Instead of paying 56k/year in costs out of her own pocket, Zelda can use other people’s money to cover the entire 56k, just by chartering her boat.
On average, yacht owners like Zelda can cover their entire yearly costs, including loan payments, with 10 weeks of chartering income. And, if Zelda chooses to charter more than 10 weeks/year, she can even create positive monthly cash flow, and now buying a yacht has become a profitable endeavor.
Chartering sound like a hassle? It’s actually fairly simple and light. Frank’s network extends from the Northeast to the Caribbean. Once you connect with a charter center, a management agreement is formed; you dictate the terms and the time period(s) your boat will be available to charter.
And they take care of the rest. The advertising, booking, cleaning, maintenance, staff, captains for the charter…. all of it. From there it’s a simple 50/50 gross revenue share; if your boat rents for 8k/week, 4k goes to the charter company and 4k goes back to you.
Will you be able to get all the charter business you need to cover your expenses? In short, yes. Especially if you’re flexible concerning where your boat can be chartered. Demand in the Caribbean is greater than in the Northeast, but most boat owners have the opportunity to charter more than is necessary to cover their expenses, should they choose to.
Their worst year on file for charter demand was 2002, but owners that year were still able to charter their boat for 20 weeks/year in locations like the Bahamas.
Were Zelda to opt for 15-20 weeks of chartering per year, she could comfortably pay off her loan in under ten years, only ever being out of pocket once, from the down payment.
In the end, she paid for 46% of the boat’s final cost with tax dollars, money that otherwise would’ve been paid to the government,
She paid for the remaining 54% of the boat with other people’s money, via charter fees.
And in less than 10 years owns outright a Luxury French Sailing Catamaran.
Not a bad gig.
For the FatCats out there with existing investment accounts of 500k or more, your deal is even better. Through Frank’s liquid securities program, you can buy a boat with 0% down, without tying up a single dollar, and without selling a single asset.
You’ll need to show that you hold liquid securities (gold, silver, cash, stocks, bonds), in the amount of 1.5X the value of your loan. You then borrow against your investment account: a collateralized line of credit.
You enjoy a fixed rate of just 2.3% (libor + a quarter point), and interest-only payments are available.
In this scenario BoatLife LLC pays you the loan payment + interest each month, and all the same tax benefits apply. For literally just keeping the same portfolio you already have, you get huge tax breaks and your own yacht, all without spending a single dollar out of pocket.
For our Canadian friends, you’re in luck. Apparently when it comes to yacht loopholes in the tax code, Canada’s policies are very near the States, and in some cases, is even more favorable to the yacht owner.
Just think, the next time you hear someone complaining about those private-jet-speedboat-loopholes for the rich, they’ll be talking about you. Thanks Donald.
-Christoph Grizzard, The Fat Cat Investor
If you want to learn more, or are ready to go now, see Franks contact info below, and don’t forget to send me a pic of the boat you settle on.
Atlantic Cruising Yachts
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