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 |
| 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.
| 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 |
| 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.)