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