Fractional Opportunity for Business

Fractional Concept – Business Ownership Example with 4 Weeks of Chartering and 75% Bank Financing

In this example you establish a business entity to own your share or shares in the LLC that owns your yacht. As a business investment, you can deduct 100% of your share of the annual operating expenses, the interest on the loan, plus 10% annual depreciation of the total investment. In this example, the entire yacht is purchased for $5M. Your 10% share costs $500,000 and you put 25% or $125,000 down and finance the balance at 6% interest only. The yacht will charter for $40,000 weekly. With each 10% share 4 weeks of use per year are allocated. The total operating expenses for the entire yacht are estimated at $400,000 annually or $40,000 for each 10% share. In this example, you decide to sell your share at the end of year seven for $470,000.

Summary
Purchase Price $5,000,000
Your 10% Interest Investment $500,000
Your Cash Down Payment (25%) -$125,000
75% Financing @ 6% interest only $375,000
Your Depreciation Tax Basis $500,000

In this example your tax statement would look like:

Charter Income (4 weeks @ $40,000) $160,000
Less: Charter Broker Commissions -$32,000
Net: Charter Income $128,000
Expenses Annually (Deductible)
10% Share of Operating Expenses $40,000
6% Loan Interest on $375,000 $22,500
10% Annual Depreciation -$50,000
Total Expenses -$112,500
Net Taxable Income $15,500

The net taxable income is decreased by the depreciation amount which is paper loss only for income tax purposes.

There are many advantages for you to establish a business ownership program. One is the liability and the second is the tax advantage. 100% of your share of the annual operating expenses plus the annual depreciation, plus the interest on the loan are all deductible for income tax purposes for each year of ownership.

CASH FLOW STATEMENT SHOWS RETURN ON YOUR INVESTMENT:

Net Charter Income $128,000
Less:
10% Share of Operating Expenses -$40,000
6% Loan Interest -$22,500
Total Cash Expenses -$62,500
Actual Cash Income $65,500

ACTUAL CASH RETURN ON YOUR INVESTMENT:

Cash IncomeInitial Investment $65,500$125,000 = 52.4% Return on Investment

From a purely cash return on cash invested standpoint the return is 52.4%. This assumes a net charter income of $128,000. In the unlikely event you fail to charter one, or even two, of your four weeks you would still realize a positive cash return. Although a smaller return, the benefit would be increased because in that year the business might show a tax loss, which would lower your overall taxes.

Assume Future Sale in our Example:
Future Sale Price $470,000
Payoff Existing Loan - 375,000
Your Proceeds from Sale $  95,000

Since you will owe about half this amount in capital gains taxes, based on the depreciated cost of your yacht, this may not seem like a lot. But remember, you’ve had a positive cash flow of over $65,000 EVERY year and have only been taxed on about $15,000 each year.

(Individuals should review this information with their personal accountant and attorney.)