45 years ago, owner Michael Dubb began his career in the equine industry sleeping in a van because he could not afford a hotel room. Last month, his thoroughbreds brought in $2.3 million from 19 Bellmont Park victories.
If you work in the horse industry, you know that owning a horse is a costly endeavor. Horses cost on average $60,000 and maintaining a racehorse averages around $55,000 per year – not including travel expenses and veterinarians. There is no need to pay more than you need to properly care for your horse and you should make certain that you are maximizing the tax benefits of your investment.
Tax law on selling horses
Like any asset that is part of a trade or business, horses have a “useful life” and are depreciable. The length of that “useful life” used to depend on the type, age and purpose of the horse:
- Before 2008, horses under the age of 12 had to be depreciated over seven years. Older horses were depreciated over a three-year period.
- From 2008 until its expiration in 2016, a uniform three-year appreciation schedule was enacted.
- The February 9, 2018 Bipartisan Budget Act benefitted horse owners by reinstating the three-year racehorse depreciation period and made it retroactive to 2017.
When you sell a horse, any depreciation you have taken is recaptured and taxed at your top marginal income tax rate . If you owned the horse for less than two years, you must pay the ordinary tax rate on the entire gain (which could be as much as 37%). If you owned the horse for more than two years, you pay the ordinary tax rate only on the recaptured amount, and the lower capital gains on the rest (currently 20%).
Horse breeding business taxes
If you are a horse breeder who sells weanlings or yearlings, you must report your net proceeds as ordinary income, and will be taxed at your top ordinary tax rate. If, however, you wait until a horse is two years old, the net proceeds of your sale will qualify for capital gain treatment and will be taxed at the maximum capital gains rate of 20%.
A loss on the sale of a horse is treated as an ordinary loss, and can offset your other income.
Note that under California Business and Professions Code Section 19525, any business or individual who buys and sells horses must sign a written bill of sale for the transaction. An agent must also use a written contract if they receive more than $500 for the sale.
The new tax law marked the end of like-kind exchanges of horses, vehicles and farm equipment. 1031 exchanges are now only permitted for exchanges of real estate.
Tax services for the horse industry
The equine tax accountants and attorneys at Moskowitz, LLP are happy to assist U.S. taxpayers who work in the horse industry. We provide tax planning and audit representation services to stable owners, trainers and coaches, farriers and grooms, veterinarians, horse owners, horse breeders, and riders. We also assist with setting up and/or maintaining equine businesses, including farms and racetracks, and prepare both standard and transaction-specific contracts that minimize our clients’ chances of future litigation. We also help with all your business and real estate issues, and ensure that you are in compliance with applicable local, state, and federal tax and property laws. Contact our San Francisco offices today.
In our final post of this series, we will shift gears to racetrack wins and losses.
* The information contained in this blog should not be used as a substitute for a consultation with your equine accountant and/or tax attorney.