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Bump's World - November 2010
November 2, 2010
GIVE YOUR BOAT AWAY
The simplest way to get ride of your fine yacht is to donate it. Other than wanting to contribute to a cause or some institution that you think has great value, why would anyone want to donate their boat when they can just sell it. There is a lot of miss information about donations and there are a bunch of guys in jail who used donation programs as a scam. The IRS laws are not exact about what donation is and their interpretation of the process changes from time to time which can make the process challenging.
How can donation lead to a scam? Here is how it goes. You list your boat for sale with the scam broker for say $100,000.00. He finds a buyer to buy for $60,000.00, which is way less than what you wanted, but it makes for a very easy sale. The selling broker is affiliated with some fake charity, like the society for the prevention of sweaty palms. The seller donates to boat to the society with an evaluation of $120,000.00 and then the broker sells the boat for the 60K and gives 50K in cash to the seller. So the seller gets forty in cash and a one hundred twenty in a tax deduction. If the seller pays about 35% in taxes he will pay 42K less in taxes plus the 50K in cash, so he sold his boat for 92K without paying a commission. The IRS did eventually catch up with this game and most have been shut down.
Here is the real deal. There are two kinds of legal donations. Donation number one is a straight donation. The organization receiving the donation liquidates it, often in an auction. The price that the buyer pays is the amount of tax deduction that the person donating the boat gets. So you have an older boat that is costing you way more in yard bills, insurance etc. You just want the boat to go away. The organization you donate to comes and takes the boat away and auctions it off and you get a letter from them showing the sale price and that is your tax deductible amount. With boats getting older and older many boats value has become way less than money need to up grade sails, electronics, etc. Many older boats when surveyed in a straight purchase deal have a list of repairs from the surveyor that exceed the agreed upon purchase price. The most common issue would be moisture in the hull and deck. A 1980 J 30 goes under agreement for $18,000.00 in the survey moisture is found in the hull & deck. The boat yard estimates $25,000.00 repair, donate.
The other type of deduction is a lot more complicated. The appraiser comes up with a market value for the boat. The organization agreeing to take the boat agrees to not sell the boat for 3 years and to use the boat in the intent of the donation. That wording is subject to discussion, however in the case of a boat, you would like the organization to use the boat. In the case of a marine academy they could use the boat in their sailing program. If the boat has a diesel engine and electronics, these are classes that a marine academy might have interest in, so the boat systems could be used in those classes. The IRS has determined that after 3 years of use, the original appraised value of a boat is no longer relevant due to normal wear and tear, so a subsequent sale price would not change the original appraised value. Therefore the original value is the amount of the tax deduction. So say the original appraised value was 100K and the academy used the boat for 3 years in their sailing program and sold her after that for 40K, the original 100K would still hold as the tax deduction. The tax deduction can be taken immediately and spread up to 5 years if necessary.
So holding the boat by the receiver of the boat, is way better for the person donating the boat. If the organization sells the boat before the 3 years the donator losses. Since many of the organizations do not want to hold the boat for 3 years, they came up with the charter purchase program. In this program the boat is donated and then chartered for the remained of the 3 years and then the title is passed to the buyer. The buyer makes payments over the term of the charter and then a larger final payment at closing. This way the organization receiving the donation gets some money right away for the boat and does not have to maintain it. The IRS is not totally happy with this program and have ruled in different ways.
Who really benefits from the donation program? Let"™s say you are a big racer guy. You want to win all the big races with all the hot sailors on your boat. You go out and hire the best designer, builder and pay the great sailors to sail your boat. You just spent 1 million dollars. You race in the big races the first year and win most everything. You are a happy guy on top of the world. The second year the newer boats start beating you and in spite of spending lots of money your paid crew is deserting you and talking about how cheap you are for not having a new faster boat being built. You cave in and order the new boat and start winning with your new boat, but your old boat sits in the boat yard gathering yard bills.
Because your old boat is a custom one of a kind there are no direct comparisons for the appraiser so he uses replacement value, which is the cost of the new boat you just built or say 1.2 million. That becomes your donated value. You donate to a marine academy that races the boat for 3 years and your donation is protected. They sell the boat for 150K 3 years later. By then you are ready to donate your present boat since you are no longer on the winning edge.
So if you have a one of a kind, custom, boat the valuation can be very favorable. You get rid of the old boat, pay no commissions and get a whopper of a tax deduction.
Bump's World - November 2010
November 2, 2010
GIVE YOUR BOAT AWAY
The simplest way to get ride of your fine yacht is to donate it. Other than wanting to contribute to a cause or some institution that you think has great value, why would anyone want to donate their boat when they can just sell it. There is a lot of miss information about donations and there are a bunch of guys in jail who used donation programs as a scam. The IRS laws are not exact about what donation is and their interpretation of the process changes from time to time which can make the process challenging.
How can donation lead to a scam? Here is how it goes. You list your boat for sale with the scam broker for say $100,000.00. He finds a buyer to buy for $60,000.00, which is way less than what you wanted, but it makes for a very easy sale. The selling broker is affiliated with some fake charity, like the society for the prevention of sweaty palms. The seller donates to boat to the society with an evaluation of $120,000.00 and then the broker sells the boat for the 60K and gives 50K in cash to the seller. So the seller gets forty in cash and a one hundred twenty in a tax deduction. If the seller pays about 35% in taxes he will pay 42K less in taxes plus the 50K in cash, so he sold his boat for 92K without paying a commission. The IRS did eventually catch up with this game and most have been shut down.
Here is the real deal. There are two kinds of legal donations. Donation number one is a straight donation. The organization receiving the donation liquidates it, often in an auction. The price that the buyer pays is the amount of tax deduction that the person donating the boat gets. So you have an older boat that is costing you way more in yard bills, insurance etc. You just want the boat to go away. The organization you donate to comes and takes the boat away and auctions it off and you get a letter from them showing the sale price and that is your tax deductible amount. With boats getting older and older many boats value has become way less than money need to up grade sails, electronics, etc. Many older boats when surveyed in a straight purchase deal have a list of repairs from the surveyor that exceed the agreed upon purchase price. The most common issue would be moisture in the hull and deck. A 1980 J 30 goes under agreement for $18,000.00 in the survey moisture is found in the hull & deck. The boat yard estimates $25,000.00 repair, donate.
The other type of deduction is a lot more complicated. The appraiser comes up with a market value for the boat. The organization agreeing to take the boat agrees to not sell the boat for 3 years and to use the boat in the intent of the donation. That wording is subject to discussion, however in the case of a boat, you would like the organization to use the boat. In the case of a marine academy they could use the boat in their sailing program. If the boat has a diesel engine and electronics, these are classes that a marine academy might have interest in, so the boat systems could be used in those classes. The IRS has determined that after 3 years of use, the original appraised value of a boat is no longer relevant due to normal wear and tear, so a subsequent sale price would not change the original appraised value. Therefore the original value is the amount of the tax deduction. So say the original appraised value was 100K and the academy used the boat for 3 years in their sailing program and sold her after that for 40K, the original 100K would still hold as the tax deduction. The tax deduction can be taken immediately and spread up to 5 years if necessary.
So holding the boat by the receiver of the boat, is way better for the person donating the boat. If the organization sells the boat before the 3 years the donator losses. Since many of the organizations do not want to hold the boat for 3 years, they came up with the charter purchase program. In this program the boat is donated and then chartered for the remained of the 3 years and then the title is passed to the buyer. The buyer makes payments over the term of the charter and then a larger final payment at closing. This way the organization receiving the donation gets some money right away for the boat and does not have to maintain it. The IRS is not totally happy with this program and have ruled in different ways.
Who really benefits from the donation program? Let"™s say you are a big racer guy. You want to win all the big races with all the hot sailors on your boat. You go out and hire the best designer, builder and pay the great sailors to sail your boat. You just spent 1 million dollars. You race in the big races the first year and win most everything. You are a happy guy on top of the world. The second year the newer boats start beating you and in spite of spending lots of money your paid crew is deserting you and talking about how cheap you are for not having a new faster boat being built. You cave in and order the new boat and start winning with your new boat, but your old boat sits in the boat yard gathering yard bills.
Because your old boat is a custom one of a kind there are no direct comparisons for the appraiser so he uses replacement value, which is the cost of the new boat you just built or say 1.2 million. That becomes your donated value. You donate to a marine academy that races the boat for 3 years and your donation is protected. They sell the boat for 150K 3 years later. By then you are ready to donate your present boat since you are no longer on the winning edge.
So if you have a one of a kind, custom, boat the valuation can be very favorable. You get rid of the old boat, pay no commissions and get a whopper of a tax deduction.
Please mail comments to me at Bump@newwaveyachts.com
Bump Wilcox