Costs, limited free time, and lack of skills are the main reasons why consumers who dream about boating may hesitate to take the plunge. These obstacles can be reduced or eliminated, thanks to boat time-shares, rental clubs, and fractional ownership arrangements
Boat time-shares and rental clubs are similar to on-land arrangements for vacation homes. But for an experience that’s as close to owning a boat as possible, nothing beats a fractional ownership. In a fractional ownership arrangement, a group of investors share in the cost of buying a boat. Owners may pay equal amounts for the purchase or they may divide up the shares in different amounts — which will be reflected in the amount of usage the individual owners can claim and their share of any profits if the boat is sold.
Fractional ownerships are often managed by a brokerage company in the business of buying new boats outright or handling sales of used boats for owners.
At the time the fractional is organized, owners can make a down payment on their share and make monthly loan payments to the broker, or they can pay for their portion of the purchase amount in full. Brokers make their money on the sale of the boat and in the monthly fees charged for managing scheduling, maintenance, repairs, storage, and insurance, but the costs are still a fraction of what a single owner would pay. Unlike informal co-ownership arrangements, where a few friends pool their money together to buy a boat, formal written agreements spell out the financial and legal obligations of the fractional owners. The agreements establish clear schedules so that owners can count on using the boat at specific times and provide opportunities for spur-of-the-moment use. Because fractionals involve direct ownership, each owner has greater control over how the boat is used and maintained and where it’s located. For example, if only four or five people share the boat, this allows for lots of flexibility in scheduling.
Owners are more likely to get their fair share of the “good days” each boating season. Fractional ownership plans are probably most user friendly and cost effective in places where it’s possible to boat year-round. Having a brokerage company take care of maintenance and repairs means owners spend all their boating time on the water, not at the dock or in the marina yard, cleaning and painting. Also, maintenance and cleaning are done on a regular basis and at a consistent standard, avoiding unpleasant surprises.
An added benefit of having a broker manage the boat is that the broker is responsible for collecting payments from co-owners, paying bills, and keeping records. This helps avoid disputes and cash shortfalls. Co-owner payments are based on a budget and regular assessment system rather than “as needed.” At the end of each year, the manager estimates expenses for the coming year, including group mortgage (if any), insurance, maintenance, repairs, and improvements, and determines the amount needed from each co-owner to pay the bills. The anticipated expenses should include some reserves for long-term recurring expenses such as engine replacements or new sails.
Usually, the owners form a limited liability company (LLC) and all are listed on the boat’s title. This reduces owners’ liability exposure if the boat is in an accident or if a passenger is injured while aboard. An LLC may also protect the shared property from seizure by the creditors of co-owners and increases flexibility if ownership changes. Fractional owners may be able to deduct interest if they pay for their share of the boat with a qualified mortgage. Boats can qualify as second homes under the IRS Code if the loan is secured and the financed boat includes a head, sleeping, and cooking facilities. However, this benefit may not be available if the owners form an LLC.
When entering into a fractional ownership arrangement, review the terms of the agreement with a lawyer and the tax ramifications with a tax consultant. Laws vary from state to state regarding fractionals, especially if the boat is used as a rental during non-scheduled periods. When setting up a fractional ownership, ensure the arrangement provides for protection for co-owners if one partner defaults on monthly payments.
If you would like to avoid the financial stress or the hassles of owning and maintaining a yacht check out what the benefits of our alternative to outright ownership.
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