Buying a yacht through an LLC in Texas....Please explain this to me.

[HighTemp]

I appear to having trouble grasping the financial benefits to purchasing a yacht through a Texas LLC. I would greatly appreciate some first hand insight on the subject.

We are looking to purchase a catamaran for cruising the Texas Gulf Coast. I certainly understand the liability benefits of doing it through an LLC, but I am having trouble with the financial benefits. I understand the ability to depreciate the value of the boat, and how that, as well as the expenses to operate and maintain it as deductions are passed through to ones personal income taxes. My trouble is specifically with county property taxes.

The boat would be berthed in the Kemah / Clear Lake area. Our thoughts were to put it into limited charter and make it available to some of the ASA schools for 114 classes when we were not using it. My concern is the Harris County Appraisal District yearly rendition rate, which is currently over 2.6% on all business property.

I have heard a number of mixed messages. My CPA's who do my business taxes on our primary business, indicate that the property tax is to be expected, but others in the local boating business say they have never heard of such a thing.

I just don't seem to be wrapping my mind around this. The amount of personal income tax offset seems to be greatly offset by the county property tax, thus making me question if forming an LLC in Texas to purchase the boat is even worth the trouble.

So anyone in the area, familiar with Texas LLC and property taxes, I would greatly appreciate your experiences and insight.

[jrambo316]

Don't forget the sales and use tax. Why I won't be registered in TX. 6.25%. If I am wrong, someone please correct me.

[HighTemp]

Originally Posted by jrambo316

Don't forget the sales and use tax. Why I won't be registered in TX. 6.25%. If I am wrong, someone please correct me.

You are correct. Sales tax is 6.25%, which I really have no issue with since that is a one time hit on the purchase transaction. My concern is the yearly property taxes which could be as much as $10K annually.

[boatman61]

Damn.. and there was I thinking Delaware was the LLC Capital of the world..

[skipmac]

Are you planning to charter the boat or use it in some way for or as a business? I'm not a CPA or any sort of accountant but I didn't think you could depreciate and write or take a deduction on property or assets owned for personal use, whether owned as an individual or under a corporation.

I can ask my accountant but unless she knows otherwise then I see no financial benefit.

[DeepCut]

A lot depend on what "trips" the tax. Is it where vessel is located on Jan 1 each year? Days in state? Declaration of home port?

Is the tax still present if owned by an individual vs LLC?

Also, to be a business deduction, your personal time may disqualify if it exceeds too much time (although time spent maintenance, including sea trails, etc). Many ways to log the time...

Not always a simple answer.

[Cadence]

Originally Posted by HighTemp

I appear to having trouble grasping the financial benefits to purchasing a yacht through a Texas LLC. I would greatly appreciate some first hand insight on the subject.

We are looking to purchase a catamaran for cruising the Texas Gulf Coast. I certainly understand the liability benefits of doing it through an LLC, but I am having trouble with the financial benefits. I understand the ability to depreciate the value of the boat, and how that, as well as the expenses to operate and maintain it as deductions are passed through to ones personal income taxes. My trouble is specifically with county property taxes.

The boat would be berthed in the Kemah / Clear Lake area. Our thoughts were to put it into limited charter and make it available to some of the ASA schools for 114 classes when we were not using it. My concern is the Harris County Appraisal District yearly rendition rate, which is currently over 2.6% on all business property.

I have heard a number of mixed messages. My CPA's who do my business taxes on our primary business, indicate that the property tax is to be expected, but others in the local boating business say they have never heard of such a thing.

I just don't seem to be wrapping my mind around this. The amount of personal income tax offset seems to be greatly offset by the county property tax, thus making me question if forming an LLC in Texas to purchase the boat is even worth the trouble.

So anyone in the area, familiar with Texas LLC and property taxes, I would greatly appreciate your experiences and insight.

You say you have a business. If it's an LLC what about buy the boat as a business asset, potential client entertainment or what ever. Get the LLC liability protestion and take a depreciation on the boat? any property tax would probably come of the top.

[Symphony]

There are many things to consider to claim a pleasure boat as a business.

at the least - it must have >50% of the use for the business, not the owner; if the IRS considers it a pleasure vacation item (like a beach house 2nd home) the limitation on owner's use is more strict.

if you are chartering it or teaching classes on board what type of insurance do you need?

if people pay to be on-board will the operator hold the proper USCG license?

if the business doesn't show an operating profit after depreciation and expenses will the IRS declare it to be a non-deductible hobby loss?

you can rent the boat 100% to a charter manager and run it as a business, but you should consider the "cost" of the massive depreciation once the charter people are done with your boat.

there are excellent tax credits and bonus depreciation benefits in the new US tax law if you are purchasing equipment for a business or if you are hiring people to work in your business.

it used to be a good deal to buy a boat as a second home and deduct the mortgage interest and property/ sales tax, but the old games of interest deduction and state tax write-offs, as well as hedge fund carries, are gone starting in 2018.

[jmschmidt]

High Temp, you stated: “I certainly understand the liability benefits of doing it through an LLC”

Do you? The protection afforded by a limited liability company (LLC) against personal liability varies from state to state. You need to check the strength of Texas law as regards to “charging orders” which may effectively protect assets (the boat) owned by an LLC from being attached and sold to satisfy creditors. However, many states have week charging order protection. Also, I suspect that a single-owner LLC, that owns a recreational vessel that is not in regular and prolonged commercial use would have very limited, if any, liability protection. It is a fallacy to believe that business entities like corporations, limited partnerships, trusts, or LLCs are a panacea for personal liability protection. In the vast majority of cases it would be far cheaper and simpler to own a boat outright and carry a substantial amount of liability insurance.

You stated: “I understand the ability to depreciate the value of the boat, and how that, as well as the expenses to operate and maintain it as deductions are passed through to ones personal income taxes.”

Do you? As for federal and state income tax benefits of an LLC, essentially there may be none unless the vessel is predominately used for commercial purposes. You can’t depreciate a capital asset (the boat) unless it qualifies as a legitimate business. If it is operated commercially, in order to get a write-off on your personal taxes you must be able to prove that you spend several hundred hours per year actively managing and operating the “business.” If not, even if it is a full-time legitimate business, you may only have a “passive activity loss” none of which may be available to offset a current income tax obligation.

Furthermore, assuming your endeavor qualifies as a legitimate business and you spend the required time to manage it, when you sell the asset (the boat) you may have to “recapture” some or all of the depreciation that you took to reduce your personal taxes. The recaptured amount is consider a gain by tax law and is actually taxed at a higher rate than long-term capital gains.

You stated: “The boat would be berthed in the Kemah / Clear Lake area. Our thoughts were to put it into limited charter and make it available to some of the ASA schools for 114 classes when we were not using it.”

Nice area. In addition to my comments above, if you do operate the vessel as a legitimate business which passes all the other tests for legitimacy, you generally only have two free weeks per year of personal use (just like a mountain ski cabin). Any more that that you will be expected to pay the going rate like any other charterer, or issue yourself a Form 1099 for the fair market value of the excess personal time you used the boat and pay taxes thereon.

First you might be interested in the publication “Tax Guide for Business Yachtsmen” available on Amazon. Setting up an LLC is simple everywhere, go on the state website, fill out the forms, pay the fee and then, by all means, hire a competent Texas lawyer and a CPA familiar with these matters.

Good luck.

[Eigenvector]

I looked into this back then, talked to my CPA and all that. I already had an LLC which owns other commerial propery so it would be easy. There was no advantage that we could come up with other that using it as a mobile office (a real stretch, pun intended). Also I was buying cash so no mortgage deduction.

One of the downsides that hasn't been mentioned so far is the fact that now your're going the commercial insurance route which is probably going to be required unless you can get the lessor to provide..

I have one LLC that owns the building that my other LLC company leases it. My insurance is significantly higher since it's not owner occupied. Each company has to have it.

[leboyd]

The Harris County bussiness property tax is a big pain. What I’ve found is that if they don’t know about your business, they don’t track you down. But if they do, you have no way of getting out of the tax as long as the property is in Harris County. I suspect they will find you sooner or later, probably through the Texas Franchise Tax.

They tax you on just about everything physical (as you probably know) - chairs, desks, inventory, computers, laptops, boat, etc., etc. As far as I can tell, all other business taxes are based on the business’ profitability. This is not. You could lose a $1mm, with $500k in inventory and still owe Harris County the $10 grand. Likewise, it’s based on the fair market value, not the depreciated value.

So, I can see how someone could own a boat in an LLC berthed at Kemah and yet never heard of the tax. If the county has not found the company owning the boat, then the owners probably have never heard of the tax.

But I think your CPA is correct.

I’d have to do some double-checking, but you may be able to use a Family Limited Partnership to own the boat and not be a “business”. You might check with your CPA is see if an FLP is subject to the HCTA rendition tax.

[foggysail]

Originally Posted by HighTemp

You are correct. Sales tax is 6.25%, which I really have no issue with since that is a one time hit on the purchase transaction. My concern is the yearly property taxes which could be as much as $10K annually.

If you document the boat, will property taxes still apply? Another thought pertaining to the LLC which we have for our business. It has to do with depreciation which may not impact you, I just don't know.

But properties purchased by corporations must be depreciated and the IRS reclaims 25% of the total depreciation when the property is sold. And it is tough to get around that 25% which they can slap you with "the depreciation you took OR should have taken."

You need to check if you will need a fed tax ID plus filing tax report even though you have no income. My point, CHECK OUT the disadvantages of an LLC for your particular application with an accountant unless you are one and know all the rules.

EDIT: Here is another GUTCHA!!! The state will require you to file an annual report plus a tax filing. In RI the annual report is $50 but the minimum tax is about $500/year

[Sailmonkey]

Kemah is Galveston county. Why are we worried about Harris? Or does Galveston have the same scheme?

[BobHorn]

Originally Posted by leboyd

The Harris County bussiness property tax is a big pain. What I’ve found is that if they don’t know about your business, they don’t track you down. But if they do, you have no way of getting out of the tax as long as the property is in Harris County. I suspect they will find you sooner or later, probably through the Texas Franchise Tax.

They tax you on just about everything physical (as you probably know) - chairs, desks, inventory, computers, laptops, boat, etc., etc. As far as I can tell, all other business taxes are based on the business’ profitability. This is not. You could lose a $1mm, with $500k in inventory and still owe Harris County the $10 grand. Likewise, it’s based on the fair market value, not the depreciated value.

So, I can see how someone could own a boat in an LLC berthed at Kemah and yet never heard of the tax. If the county has not found the company owning the boat, then the owners probably have never heard of the tax.

But I think your CPA is correct.

I’d have to do some double-checking, but you may be able to use a Family Limited Partnership to own the boat and not be a “business”. You might check with your CPA is see if an FLP is subject to the HCTA rendition tax.

South side of Clear Lake is in Galveston county.

[DotDun]

If you purchase the LLC, you won't pay sales tax on the boat. ???