CPA advice

[mawyatt]

Seeking CPA advice on a 340 purchase. Any advantage to financing vs. cash regarding taxes and earning potential? Any advantage to close the deal before year end?

If we were to finance the boat and get the 2nd residence tax deduction on the interest or pay cash? If we finance we can invest the $ we would have used for the boat to offset the boat finance interest and get the tax deduction but must pay taxes on the interest from the invested $. Not sure which is the best way to go.

I'm sure this senerio has come up before, sorry for the bandwidth use.

Thanks in advance,

Happy Holidays,

Mike

 

[mrsrobinson]

Not a CPA, but we kept our cash where it was, earning good returns for us, financed the boat and take the 2nd residence deduction on the interest each year. Doesn't hurt that we got a great finance rate too.

 

[comsnark]

Not a CPA. . .but I have made these type of decisions in the past.

First. . .no year end advantage to speak of, so take your time.

Second. . standard disclaimers: There is no issue regarding default, is there? If you lose your job, you still have money for any payments, correct? Anyone can lose their job for a year. If the boat sinks. . you are still going to continue payments, correct? I mean, the loan company doesn't care if the boat sinks: If you stop making payments, they WILL sue you, they WILL go after your house, and they WILL wreak your credit. (this is why you have insurance)

Ok. . .so since there is no question of default, and you are financially sound. . .here are my thoughts.

a) Remember AMT. Figure 10 years of raises, and see where you are with respect with AMT cutoffs. Once you hit AMT, the extra interest deduction does you no good.

b) The trade off here is a standard leveraged financial gamble. You are borrowing money at 4%, and hoping to make more than 7% in the market (or thereabouts). Remember. . .you need to beat not just the interest rate of the cash you finance, but the interest rate PLUS capital gains taxes. Remember that Capital Gains rates have a tendency to move over time. I can't remember: Was Capital Gains rates part of the Bush Yo-Yo tax code?

Look back five years, and the leveraged cash was a GOOD bet. Market has been beating 10%. Leveraging cash is a good move.

Look back ten years. . .and the leveraged cash doesn't look as good. There were a few -30% years in there. Dow went from 12,000 to 7,000 in a few years. Yikes! So it is a gamble.

c) There is a psychological side to this. For me, when faced with this choice, I just wrote ONE check. No more checks. It's done. I just use it and enjoy it. I will continue to do so even if I lose my job, even if the market goes back to 7,000. No fretting.

 

[Morpheus]

In Florida, if I remember correctly we can write off big ticket sales tax purchase items this year again. I did this last year for the boat and the year before that for the truck. That would be the advantage of closing the deal this year. As for financing or cash purchase I think not paying interest is always better unless the interest on the loan is less then the amount you can get on return from a CD or something.

Here is a link to the Sales Tax Deduction law extended through 2007

http://www.irs.gov/newsroom/article/0,,id=165636,00.html

 

[barryg]

Yep, while it hurt to write the Sales Tax check when I bought the boat in May, I know I can deduct it (and any large purchase) in this years tax return (in Florida). Also since it qualifies as a second home, I can use the interest I pay on the boat loan as well as my mortgage interest as a deduction. On my 25' Doral, I paid all cash and it was great not having to make that monthly payment, but that was a 2003 25' Doral, not a 2005 320 Sundancer, and for me it made things easier to finance, and left me some cash to put in the toys I wanted--the Garmin touch screen GPS 5208, Radar, 26" HDTV in the cabin etc.

Bottom line, depending on your tax bracket and cash position, considering it is a depreciating asset, it might make more sense to pay in full when you purchase, or if financing gets you a newer and larger boat and is affordable for you, financing is not a bad way to go either.

Barry

 

[mawyatt]

Thanks for all the good advice everyone.

BarryG,
Will the Florida big ticket sales tax fed deduction apply next year (2008)? I get hammered so every bit helps.

TIA,

Mike

 

[barryg]

Mike, it's a year by year thing here..They have passed it the last three years, but I'm not sure if it includes 2008, or they again have to approve it for next year. I'll see my CPA tomorrow and will ask her if she knows and let you know.

Good luck with whatever you decide!

Barry

 

[comsnark]

Well. . we are talking BOATS here, which are not "assets". They are toys. Like all toys, they loose substantial value each year. Don't think so? Look at the prices of a 1997 320DA. Now take a look at a 1987 320DA (or whatever).

If you finance the boat because you don't have the cash today. . .you are taking a genuine risk.

What happens if the economy craters? Do you loose your job? Do you lose your job and find that NOBODY is buying 3 year old luxury boats that don't meet the new 2009 Edwards CleanGasBurner Regs? What happens if the new Romney FlatTax removes both the home and 2nd home interest deductions? And the flat tax rate is 31%? (Remember: The middle class ALWAYS loses. ALWAYS. No exceptions.)

If you have the cash, and finance anyway. . .then you have many options. Afterall. . . . as he economy starts to teter you still have the option of paying off the loan or dipping into the cash to make the payments. The risk profile is completely different.

OF course, thinking that way is very UnAmerican. And will result in you buying less expensive boats (and less expensive cars). I know I could have bought a newer and bigger boat if I financed. (I bought a 9 year old boat) -> but I also know if I loose my job, I still have money for fuel and maintenance this year.

 

[mawyatt]

Thanks BarryG,

Too many decisions to make...and with the upcoming new 350 replacing the 340 that's another issue. I took a look at the 330 on line and it has lots of nice features. I think the local MM has a 330 so I need to go and take a first hand look.

Happy New Year,

Mike

 

[mawyatt]

Comsnark,

You bring up some good points. Yes these are nothing more than big expensive toys, being an electrical engineer involved in integrated circuit design among other things, I'm not too worried about employment. My family enjoys our boat (260) and getting a bigger boat seems like a good family toy...but it's still a toy!!!

Happy New Year,

Mike

 

[Four Suns]

What happens if the economy craters? Do you loose your job? Do you lose your job and find that NOBODY is buying 3 year old luxury boats that don't meet the new 2009 Edwards CleanGasBurner Regs? What happens if the new Romney FlatTax removes both the home and 2nd home interest deductions? And the flat tax rate is 31%?

You forgot to mention "What if aliens land in UFO's and take over the world?" and "What if an asteroid hits the earth and causes large tsunamis and world destruction?"...

(Remember: The middle class ALWAYS loses. ALWAYS. No exceptions.)

Oh brother....

 

[comsnark]

Heheheh. . . . why did I think Gary might pop into this thread?

I fully admit that my examples of the unexpected were a bit stretched. However, take a look at the entire SubPrime mortgage situation. Without going political, or commenting on either buisness ethics, I think it is fair to say that people are being burned by making *incorrect* economic assumptions (the biggest being that housing prices always go up!)

Part of the reason that I made these examples was from my own experience with JetSkis. I have '93 ski that is now so underpowered; I can't sell it if I wanted to. I have a decent '97 ski; but it has a two stroke engine. I suspect the market for non-four stroke jetski's has really dried up in my area.

Peace! and have a good new year!

 

[nirvana2]

Good Grief.