Tax Information, Part II

Last month, Governor Paterson put forward his plan to overcome the multi-billion dollar budget shortfall that New York State faces over the next few years. The plan grabbed a lot of headlines for the proposed "Obesity Tax" on non-diet sodas, but that isn't the only new tax boaters might have to watch out for: the Governor has also proposed an additional 5% sales tax on boats over $200,000.

This luxury tax (which would also be applied to cars, planes, jewelery and furs over a certain value) has been implemented before on the national level, with a very negative outcome. The non-partisan tax research group Tax Foundation (http://www.taxfoundation.org/) has a succinct analysis:

Generally, luxury taxes are gimmicks that raise little tax revenue (projected at $15 million for FY 2010-11) while appealing to class warfare sentiment. A 10% federal luxury excise tax imposed in 1990 devastated the yacht industry, and employees thereof. Because yacht sales fell sharply after imposition of the tax, revenues were far below projections. Ultimately, Congress responded by repealing the tax.

The lesson of the yacht luxury tax is instructive: narrow-based taxes are more likely to have distortionary effects than broad-based ones, as it is relatively easy for consumers to substitute an untaxed purchase for a taxed one (e.g., by taking fancy vacations instead of buying a yacht, or by purchasing a used yacht made before imposition of the tax.) By contrast, income and general sales taxes must generally be avoided by earning or consuming less, which are more difficult steps to take.

It seems painfully obvious that this is a tax proposal that will only hurt the state, as consumers will spend their money elsewhere. Circumventing the tax would be as simple as forming an out-of-state corporation and registering the boat there (something your broker can advise you on).

The entire proposal is currently being reviewed by the state legislature, so if you are a New York State resident this could be a great time to call or email your senator. The New York Marine Trades Association is also working to lobby against the proposal, and will be unveiling a website to broadcast their concern. Stay tuned for more details.

Tax Information for LIS Boaters

If you do any boating in NY state waters, there are some important developments in how the state is collecting taxes that could effect you, no matter where your boat is registered.

It is very common for residents of New Jersey and Connecticut to keep their boats in New York, and in this situation owners are expected to report to the NY state DMV and pay the difference between the sales tax they already paid (in, say, Connecticut) and what the sales tax would be in New York. In practice, very few owners did this or were even aware that this was required, and the state made little effort to chase down the extra revenue.

But the massive revenue shortfalls have motivated a crackdown, and the state has begun auditing marinas, yacht clubs and even boatyards. If they find a boat that hasn't paid sales tax in NY state, the owner receives a bill that includes interest and penalties. It's doubtful that they will catch everyone this way, but if they catch you it will be an unwelcome surprise. **Note that owners who have responded proactively to this bill have, in some cases, been able to negotiate down some of the penalties.

Stay tuned for an update on Governor Paterson's additional 5% "luxury tax" on yachts over $200,000.

A New President

Today is a day that many of us have been anticipating for months, or even years. Politics aside, we have a new leader in place that might be just the kind of figure we need to guide the country through a very difficult period, someone who can lead us as we "begin again the work of remaking America."

If we need a statistic to underscore President Obama's point that our present challenges "will not be met easily or in a short span of time," I would submit that the Dow's 4% fall on this otherwise hopeful day serves that purpose. So the road ahead is looking like a long one.

Fortunately for us, the wind is still free.

Market Paralysis

Last fall, as the 2008 season was coming to a close, I felt great. My second "season" as a yacht broker was a successful one, and I was happy with what I had been able to do for my clients. The economic slowdown that had been looming over the summer didn't seem to be effecting my clientele yet, and I had some great listings to keep me busy over the winter.

Then, perfectly timed with the Newport Boat Show, Lehman Brothers collapsed, taking the rest of the economy with it, finally catching up with just about everyone. Of all the challenges I was expecting with this job, I never thought I would be dealing with the greatest economic crisis since the Depression.

I am fully prepared to ride this out, and while the frustration does catch up with me occasionally, I mostly just want to adapt and move forward. The frustration comes from the current state of the boat market, which is near-paralysis. Sellers aren't willing to drop their asking prices any further, and buyers think that everything is overvalued and the market is going to reset. In my view, there is some middle ground and it requires buyers to realize that a good deal is not always 50% of the asking price (see earlier post).

I am 'buoyed' (sorry) by a few clients that are realistic and ready to take advantage of the buyer's market, and I'm also lucky to have had some deals come together over the last few months. But I will be very happy when the market - and the water - warms up.

The Donation Option

With the donation this week of Jim Swartz's STP-65 Moneypenny (at left - stop drooling) to a maritime college here on LIS, yacht donations are suddenly getting a lot of press. When you give away a multi-million dollar boat just 6 months after it is launched, you're going to get some attention.


I handled a J/35 donation for a client two summers ago that was a real win-win, and it is an option I always discuss with my clients that have hard-to-sell boats. To be clear, donation is a last resort, but if we've exploited all of our other options, it is one that can work out well.

For an owner, the tax write-off is the central issue, and this is where you need to be careful (and have a broker representing your interests). Many organizations that solicit boat donations will immediately turn around and sell that boat for a fraction of it's value, usually on sites like eBay. In this scenario, the donor can only legally write-off the selling price of the vessel. Not a positive outcome.

The far better scenario for the donor is to donate the boat to an organization that will use it for a minimum of three years (it's called "significant intervening use" in the tax code). This allows you to deduct the full appraised value of the yacht as determined by an accredited surveyor - a figure which is usually much higher than what you could actually sell the boat for on the real market (think asking price vs. selling price).

Most often the organization is a maritime school that relies on a sailing program to teach skills like seamanship, teamwork and leadership. If you've done major regattas then you've probably raced against donated boats run by midshipmen. As a donor, you get the enjoyment of seeing your old boat out there on the racecourse with a full crew of enthusiastic kids.

So should you still be working with a broker? Absolutely. Good brokers have long-standing relationships with the maritime colleges, and more importantly we can manage the whole process and make sure you have all of the necessary documentation from the school to satisfy the IRS. The school will typically pay a small commission to the brokerage, but that has no effect on your write-off.

Finally, if you are trying to sell your old boat so that you can upgrade, the donation option is especially appealing right now, in that it allows you to take advantage of an extremely strong buyer's market.

If you want to talk specifics or you think this might be right for you, feel free to get in touch.

Warren Miller Sailing Video

Here is a great short film Warren Miller made on yacht racing in the 1980's in Newport, RI and San Francisco, CA. The boats don't seem quite so "state-of-the-art" now, but many of the competitors are the same.

Part I:



Part II:



Part III:

Furling Mainsails

Since the dawn of time, Mankind has debated the relative merits and weaknesses of in-mast roller furling mainsails.

Ok, maybe not since the dawn of time, but if you get a few sailors together and ask them to debate this topic, you will likely get some very strong opinions. The system was originally conceived by our sport's Chief Innovator, Ted Hood, and hasn't changed much since. In my days as a Bareboat Cruising instructor for Offshore Sailing School, I taught students to use Selden's version of this system. While it saved us the hassle (is it really a hassle?) of dealing with the mainsail cover and attaching a halyard each time, it was a complicated system to operate correctly. And new sailors that are stepping up to a cruising boat have enough complications to deal with already. But even for experienced sailors, there are some problems to consider.

The most obvious liability is the potential for the sail to jam in the mast. This usually happens when the sail is about half-way out - exposed to the wind but with enough material on the spool to jam. And then what? Well, dropping the halyard is certainly not an option at this point. If it's not too windy and you have some searoom and crew, then you can probably work the furling line and the outhaul for awhile and clear the jam. But usually you're having the problem in the first place because it is already windy.

I had a client that chartered a boat in California to sail out to the Channel Islands a few years ago. On the way back the wind built quickly while they were on a broad reach. When they tried to reef, the sail jammed fast going into the mast, started flogging in the 30 kts of breeze, and quickly tore itself to ribbons. Of course this doesn't happen all the time, and prudent seamanship might have prevented it in this example, but I would say prudent seamanship also means keeping your boat's most vital systems as simple as possible.

Beyond the horror stories, I have a few simple gripes about the system:

• they require you to operate two lines (furler and outhaul) at once, as opposed to just a halyard


• the larger mast section and spool adds a substantial amount of weight aloft, raising the vertical center of gravity (VCG) and making the boat more tender


• limited control over sail shape (especially the draft and leech tension)

On big heavy cruising boats like a Beneteau or Island Packet, the performance sacrifice from the higher VCG and inability to adjust sail shape is negligible. So if that's the kind of boat you're shopping for, then a furling main might make sense for you.

But there are some great alternatives, and if the boat you're thinking about is one that has some performance potential, you owe it to yourself (and the boat) to consider them. I'm working with a client now who is considering, among other options, a Sabre 386. A great boat, and one that would absolutely benefit from a traditional main. But this client often sails short-handed, or with non-sailing friends, or with his young family. Here is how he can set-up the main to get the best of both worlds:

• install an electric halyard winch


• make sure you have good ball-bearing slides at the mast (this eliminates the friction that makes it hard to drop your main)


• install Lazy Jacks or a Dutchman system - these contain the sail as it goes up and down


• have a StackPack installed - when you drop the sail, it goes right into a bag/cover that's permanently attached to the boom, then you zip it shut and you're done

Newer, higher-quality boats usually have at least two of the 4 items above - in this case the particular boat we're considering has everything but the StackPack.

Finally, if you want to make it even easier, the latest in-boom furling systems, though expensive and somewhat complicated, have virtually none of the liabilities of in-mast furling and all of the benefits. I've worked with a few clients that had the LeisureFurl in-mast system retrofitted and they've all been pleased with the results.

Firesale? Well, not exactly...

So we've put 2008 behind us and it's time to look ahead to a New Year - something I think we're all ready to do. There's no doubt that the changes in the world over the past 6 months have had a sizable effect on the sailing community, and the climate for buying and selling boats is dramatically different than it was even 6 months ago.

However, deals are still happening, and there are some exceptional values out there for anyone that is buying. Pricing is determined largely by inventory. If you are selling your boat and there are several other sisterships on the market in your region, you should be prepared to negotiate; otherwise you're just wasting your time. Buyers that are shopping for a mass-market production boat will be able to get some fantastic deals over the coming months.

On the flip side, if you're shopping for a specific model and there are only one or two available in your area, a seller is not going to be motivated to accept the first offer that comes along. If it's a boat with a strong resale value and a good reputation, chances are the owner loves it and is content to hold on for a worthy offer.

So when will the market get back on its feet? I was hoping you could tell me. But it will. If you're reading this blog, then you know what it's like on the water. There is a feeling out there that can be found nowhere else, and the economy can't touch that. As life gets more complicated, the idea of being on the water with family, with friends, or alone is only going to be more appealing.