Placing Your New Yacht in Charter

Thanks to the Section 179 accelerated depreciation provisions of the 2008 Economic Stimulus Act passed by Congress and signed into law by the President in February of this year, purchasing a new yacht has never been more affordable than in 2008 if you place your new boat under charter management. The tax benefits are truly astounding (in some cases allowing you to deduct the entire cost of a yacht) and they expire at the end of this year.

As you read further, bear in mind that placing a boat in charter doesn’t stop you from using it. It’s available for you to use (subject to some limitations) and will generate charter income when you’re not using it.

In general, here’s how the tax laws apply to charter boats. Chartering converts your yacht from a personal to a business asset. As such, your purchase of a yacht qualifies for tax deductions on your personal income tax return that are normally applicable to business investments, including a significant tax deduction in the year of purchase and on-going deductibility of charter-related expenses, while generating revenue to pay for ownership expenses. This revenue is earned while your yacht might otherwise remain tied to the dock.

Here are the highlights of the new law and what it can mean for the purchaser of a new boat placed in charter in 2008:

Section 179 Expense Deduction Doubled to $250,000

If you purchase a new boat in 2008 and place it in charter service, you can write off the cost of the boat or $250,000, whichever is less, on your 2008 income taxes. For example, if you purchased a vessel for $200,000 you could write off the entire purchase price in 2008.

Section 179 Investment Limit Raised from $510,000 to $800,000

You can purchase a boat for up to $800,000 and still get the full $250,000 deduction. For every dollar over $800,000, you loose a dollar of immediate deduction. For example, an $850,000 boat would get you a $200,000 Section 179 deduction.

Charter Boats May Qualify for Additional 50% First-Year Depreciation

If the $250,000 write off isn't enough to fully offset your tax liability, this additional depreciation opportunity will bring your total deduction even higher, especially on larger yachts. Any amount not deducted in the year of purchase can be deducted over the ensuing ten years according to applicable depreciation schedules.

The above is a great tax minimization opportunity, especially if you have stock options or a bonus that you'd like to shelter and, as an additional benefit, THE ALTERNATIVE MINIMUM TAX DOES NOT APPLY TO ANY OF THE ABOVE DEDUCTIONS!!!

Placing your yacht in charter not only provides you with tax deductions that can dramatically reduce the cost of owning your yacht, it also lets you enjoy professional care and maintenance for your yacht provided by the charter company. Chartering enables you to use your time for boating - while letting an experienced service staff attend to the hassles of maintenance.

Here is a summary of the tax and operating benefits available for new yachts placed in charter in 2008:

1. By placing a new yacht in charter in 2008, you can receive a tax deduction under Section 179 of the Internal Revenue Code of up to $250,000, or the price of your new boat, whichever is less, and additional first-year depreciation equal to 50% of the remaining cost of the boat in excess of $250,000, up to a maximum deduction of $400,000.
2. You are able to depreciate the remaining cost of your yacht (that portion not taken as a deduction in 2008) using 10 year accelerated depreciation (MACRS).
3. You will receive income from the charter of your yacht (60% to you and 40% to the charter company).
4. You can deduct against charter income all ordinary and necessary charter related expenses (berthing, insurance, repairs, loan interest, etc.)
5. Your yacht will receive the care and management of a professional staff - just compare the condition of yachts in a charter fleet to other yachts in the marina.
6. You will have the opportunity to significantly reduce the time it takes to pay off your yacht.
7. There will be a dramatic reduction in ownership expenses.

We’ve been placing new sailing and motor yachts in charter with Club Nautique, the Bay areas largest yacht charter company, for over a decade and we have seen many yacht owners take advantage of this program. If placing a new yacht in charter is of interest to you, we will be glad to discuss it with you, answer your questions and assist you with the entire process.

Several caveats:

(a) We’re not tax accountants or lawyers and are not able to give you tax advise. Everyone’s personal financial situation is different. Also there are certain rules and limitations that apply in order to take advantage of these tax benefits, and you will need to be familiar with them. Guidance from an experienced tax professional is always advisable in considering an investment of this type.

(b) Placing a yacht in charter won’t enable you to afford a boat that is well beyond what you might otherwise be able to afford. For example, if your income is $75,000, placing a yacht in charter won’t enable you to afford a $400,000 yacht. As a rule of thumb, if you have the income to afford a yacht at a certain price level, you’ll be in a position to take advantage of the tax benefits summarized above, thereby significantly reducing your cost of ownership.

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