50% Bonus Depreciation on a New Aircraft Purchase

The 2008 Economic Stimulus Act offers 50% bonus depreciation on new aircraft purchases – provided the contract is entered into in 2008, and that the aircraft be used more than 50% for qualified business use.

The emergence of the very light jet market has stimulated a market for trading aircraft purchase contracts. However, the time between a buyer and seller entering into the contract and taking ultimate delivery is often a matter of four to five years.

Can you still get the bonus depreciation if you buy somebody else’s purchase contract in 2008?

2008 CONTRACT REQUIREMENTS

Generally, the purchase of the contract rights in 2008 by an unrelated party will qualify for bonus depreciation regardless of the original contract date.

Example: Joe Smith entered into a contract with Eclipse Aviation to purchase an aircraft in 2004. He sells his aircraft purchase contract to Jim Jones, an unrelated party, in 2008 and Eclipse allows for the transfer of the position. If Mr. Jones would otherwise qualify for bonus depreciation on the new aircraft, the fact that Mr. Smith had entered into a contract prior to 2008 will not deny Mr. Jones the qualification.

However, most aircraft manufacturers discourage the transfer of positions and contractually limit them. But savvy purchasers often establish special purpose entities to hold aircraft positions and the entity ownership transfer will not violate these contractual agreements. The pre-existing contract disqualification applies only to the taxpayer and related parties - unrelated parties may acquire pre-2008 contracts without adverse tax treatment. Qualification for bonus depreciation by purchasing a special purpose entity that holds the contract would therefore be determined by the nature of the entity and its tax status.

Example: Jim Thomas formed Thomas Equipment Leasing, LLC for the purpose of acquiring a Cessna Citation Mustang. He entered into his contract in 2005 and sold the membership interest to unrelated Widget Industries Corp. Widget Industries retained the Thomas Leasing, LLC entity and reported its operations in its corporate return. Because the taxpayer of a single member limited liability company is its owner, and Mr. Thomas is not related to Widget Industries, Widget will not be excluded from qualification of bonus depreciation based on the pre-existing contract rule.

Example: In 2006, Mr. Thomas formed Thomas Industries, Inc. for the purpose of acquiring a position on an Embraer Phenom 100. Mr. Thomas elected Subchapter S status for the corporation so that he could report its operations in his individual return. He decided to sell all of his shares to Blackacre Corp., an unrelated S corporation, who would report the consolidated operations in their return. Although substantively this appears very similar to the previous example, the binding contract exception would prevent Blackacre from taking bonus depreciation. Although a single member limited liability company is a disregarded entity for tax purposes, and therefore the taxpayer is its owner; a flow through S corporation has a separate taxable existence and the pre-2008 contract would be attributable to that taxpayer and may therefore prohibit qualification for bonus depreciation treatment.

Example: Big Jet Aircraft Management, Inc. entered into a contract in 2006 to purchase a new Hawker 800XP to resell and manage for its fractional owners. Prior to the sale, Big Jet contracts with one owner to buy half of the interest in the aircraft for the position under its 2007 contract, and retains the other half. Big Jet sells their second portion of the aircraft after delivery in 2008. Assuming that Big Jet is a licensed aircraft dealer, both portions of the aircraft qualify for bonus depreciation.

Louis M. Meiners, Jr.
President
www.advocatetax.com

The Top Ten Mistakes made by Collectors of Art, Antiques & Other Valuable "Stuff"

Michael Mendelsohn, art collector and author of the book Life is Short, Art is Long, declares "Top Ten" artful mistakes:

1. Failure to use a team approach when planning for your art
assets

2. Failure to recognize if you are a collector or an accumulator of
common objects… and misunderstanding the difference

3. Failure to understand the art headlines in the press;
- “Times could not have been worse for Sotheby’s and Christie’s”, “No
super-rich collectors died this winter”
- “A Colossal Private Sale by the Heirs of a Dealer”
- “An Art Donor Opts to Hold On to His Collection”
- “McARTney Art Wars”
- “New York Public Library to Sell Artworks to Raise Funds”
- “For Sale: Our Permanent Collection”
- “Important Works from MOMA Collection Expected to Highlight May
4th Sale”
- “Spielberg and the Case of the Stolen Rockwell”
- “Lawsuit Ended Arbus Auction”
- “Astor ‘Con’ Artist”

4. Assuming you have proper documentation, including cost basis,
proper title, provenance and current opinion of valuation

5. Failure to take advantage of current tax laws which allow you to
reduce current income tax, eliminate capital gains and estate
taxation on your art assets

6. Failure to understand the effect a large art inheritance will
have on children and future generations…avoiding the
family “art war”

7. Assuming your kids want your stuff…and other delusionary
tales. Misplaced trust in conventional wisdom; “My kids will
sort it out” or how the value of your art assets may be
diminished by 60-80% and the failure to discuss the
methods of protecting a valuable collection from the IRS

8. Confusing Estate Planning with Art Succession Planning,
and not taking into account how to help your favorite
charities and creating a “family art legacy”

9. Failure to understand the “downsides” of not developing an
art succession plan, both lifetime and postmortem.
Avoiding the “empty hook” estate plan - and future family
tax woes

10. Failure to leverage/arbitrage your art holdings for the
benefit of your favorite charities as well as develop a plan
to protect this asset from creditor’s claims

Michael Mendelsohn
President
www.BriddgeArtStrategies.com

There's No Place Like.... Your Boat

David Reitze is a second-generation boater – his dad was a Navy Captain. So, David knows his way around boats. And owning his own mortgage brokerage, he seems to also have a pretty good grasp of the numbers – particularly when it comes to designating his yacht as a second home.

One of the nice things about owning your own boat is the IRS will let you call it a second home. As long as your boat has a sleeping platform, toilet and cooking facilities, and some indication that you stay overnight on the thing at least 14 days a year, you’ve got yourself a second home (the same holds true for an RV or trailer).

Now, of course, if you already have a second or vacation home then you can’t designate your boat as such. But David Reitze doesn’t see why you would want a vacation home when a boat can provide so much more. But more on that later….

First, let’s talk about the numbers.

A few years back, David wanted to upgrade his 43 foot yacht to something a tad nicer. He purchased a well-fitted 47 foot yacht that seemed to meet his needs perfectly. And, by declaring his new yacht as his second home, he was able to reduce his income in the following year by $19,200 (deducting the interest paid on his boat loan – think of the mortgage interest deduction on a home). What’s more, he was able to deduct the annual state registration fee of $3,600.

But the beauty doesn’t stop there. Deducting interest and fees associated with his newly purchased yacht was instrumental in reducing David's income sufficiently to drop his tax bracket from 39 percent to 36 percent – saving him, pardon the pun, a boatload of money.

Think about that for a second… purchase a new yacht that will provide your family with countless hours of fun and memories – and drops you a tax bracket at the same time.

That, my friends, is Funvesting!

But, lest we focus solely on the financial side of life, listen to what gets David really excited.

With two young children, David can’t say enough about the virtues of having his boat as his vacation home. Every weekend he gets to take his kids to a new port of call. You can’t do that with a vacation home. For New Years, David sailed the family and their yacht to Seattle and dropped anchor in the one of the local harbors. It cost him about $40 a day. Contrast that with a nice suite in Seattle on New Years Eve that will run you about $400 a night. Finally, property taxes on a beachfront vacation home are astronomical. With a boat, you already own waterfront property - without the sky-high property taxes!

And, as David Reitze is so fond of saying, “You can change the location of that waterfront property anytime you decide to set sail.”

Exchange Your Vacation Home And Avoid Capital Gains

In a recent revenue ruling, the IRS has provided a safe harbor to allow certain owners the possibility of completing a 1031 exchange on their vacation home.

Getting its name from its section in the IRS code (section 1031(a)), a 1031 exchange provides that "no gain or loss is recognized on the exchange of property held for productive use in a trade or business or for investment if the property is exchanged solely for property of like kind that is to be held either for productive use in a trade or business of for investment."

Simply put, you can exchange a business or investment asset for another a similar business or investment asset and never have to recognize any capital gain. In theory, you can continually exchange your asset and defer the gain in perpetuity (forever).

However, one cannot simply go out and swap properties. To qualify for the special tax treatment, you must comply with a variety of requirements in terms of the timing and structure of the deal. Fall outside these requirements in any particular and your special tax treatment is blown. In other words, don't try this at home.

And, up until recently, the IRS said, "Don't try this on your vacation home."

Well, now they've provided a safe harbor where, if you qualify, you can complete a 1031 exchange on your vacation home! The issue comes down to whether you can qualify your vacation home as a business or investment asset. Most would consider a vacation home as an investment, but the mere fact that you expect your vacation home to increase in value over time does not qualify it as an investment asset in the IRS' eyes (believe me, somebody already tried and failed at that).

The issue is whether the IRS feels your vacation home is used more for business or pleasure. If your vacation home is used solely or mostly for your own personal benefit, then you will not be able to use a 1031 exchange. However, if you rent out your vacation home, you may be able to use the 1031 exchange - and still use your vacation home for personal enjoyment!

Here's what the IRS stipulates. To use a 1031 exchange, you must:

- own the vacation home for 2 years prior to the exchange.
- rent the vacation home for 14 days or more in each year prior to the exchange.
- limit the personal use of your vacation home to less than 14 days or 10% of the rental usage.
- apply the same above standards for the "replacement property" you plan to exchange your current vacation home for.

In short, if you can use your vacation home as a rental property, the IRS will let you continue to use it personally (within limits) and use the 1031 exchange when you want to change or upgrade your property's location - thus keeping the tax man at bay at least for a few more years until they decide to come out with another revenue revelation.

The Funvesting Story:

I grew up in a family with eleven kids. My dad was an orthodontist. How else could he afford to raise that many children?

Being a doctor he was always inundated with different investment opportunities. I remember one investment in particular. Dad had joined some family friends in purchasing a cattle ranch located near the tiny town of Payette, Idaho.

It was years later, when I had entered the financial planning field, that I was talking to Dad and I asked him how that cattle ranch turned out as an investment. He told me that they broke even on the cows and they made money on the real estate.

I said, “Dad, that was the best investment you ever made.”

You see, when our family would go to that ranch in the summer time, we would float the river, ride horses, motorcycles, play with the cows, hunt, fish. In the winter time we would go tubing, snowmobiling. There was even a hot springs nearby.

I said, “Dad, that was the best investment you ever made.”

From that experience, I realized that there are certain types of assets that have a value component to them - they may even bring a financial return. But often these investments – Funvestments, as I have come to call them - are driven more by passion, fun, fulfillment, or family memories. Things like recreational real estate, vacation homes, boats, yachts, planes, jets, collectibles, art, cars, etc.

I've been enamored ever since by the idea of Funvesting and decided to bring together, in one place, all the financial, tax, and planning strategies that will enable people to purchase, use, and transition (as well as ENJOY) their enjoyable assets.

That's Funvesting!