# Guaranteed Income Programs - taxes



## The Traveler (Jul 1, 2017)

Hello,

I am in the very early stages of exploring charter yacht ownership through a company like Dream Yacht Charters. The guaranteed income programs are attractive as a way to pay off the boat sooner, and enjoy owner time around the world. 

My CPA mentioned there may be tax consequences to this arrangement that he'd need to explore. Has anyone here already researched this with their accountant? Do the 9% payments and the owner time count as taxable income? 

Thanks


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## kd3pc (Oct 19, 2006)

The Traveler said:


> Hello,
> 
> I am in the very early stages of exploring charter yacht ownership through a company like Dream Yacht Charters. The guaranteed income programs are attractive as a way to pay off the boat sooner, and enjoy owner time around the world.
> 
> ...


Your CPA should answer these for your situation. When I did this back in the early 2000's the boat (and program) were for all intents and purposes a business. What came in was thrown against what went out, everything - down to visits to the boat, missing dock lines, etc.

What was left over of the income was then taxable, IF there was anything left over. Many times expenses are what is left and that is then loss. Either way, TAXES were paid on the income, usually at a basic rate, some tax guys will put the boat in a longer depreciation schedule or ...OR the whole thing was a loss, and that went to the deductions, or loss carry over and so on.

Do not delude yourself in looking at this program, you will be paying for every touch of the boat by the Charter company, you will be paying for 4 or 5 oil changes of every engine on the boat, You will pay for missing docklines that the company's "Best charterer" left somewhere else. Dock lines for a 40 footer - almost a thousand bucks back then, the charter company cost, when I could get them for half that...

Anyway best of luck. Most of these programs are heavily geared towards high income folks who can, or need, to afford the losses/write offs. It is not for the feint of heart. Imagine this week in NC, with the mandatory evacuation - what happens to your boat when you lose 4-6 weeks of charter income?


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## The Traveler (Jul 1, 2017)

It sounds like you were in one of the plans marketed more for chartering as a business. You pay for maintenance and upkeep costs, they do the marketing and booking. I agree, that is not a good program for me. 

I am looking at one of the simple guaranteed income programs. I pay for the boat, they pay all other expenses. I have no involvement in the business side of things. I get payments equal to 9% of the boats value every year divided over 12 months. 

I'm wondering if anyone's had experience with this type of program and any related tax consequences. 

Thanks.


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## Telesail (Dec 28, 2011)

Depending on your desire to use your owner time, these guaranteed income deals can make sense. I am happy with my current arrangement, especially since the company who manage my boat do an outstanding job on both maintenance and screening charterers. 

As far as I understand, the taxes you will pay are on the 9% less the depreciation. If you have interest payments that are tax deductible then that shelters some income. Owner time is not a taxable benefit because you own the boat and have paid for it unless you sell that time on. In that latter case, it would simply be income in the normal way. 

I am not a CPA (nor a US resident) so my tax position may be different but the US income on my US assets are taxed under the US code so this should be representative of the situation you describe. I use all my owner time but if it were traded for time on other boats (especially outside the US) that might complicate the situation.

All that said, I suggest taking advice from an actual CPA rather than a sailing forum member.....


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## The Traveler (Jul 1, 2017)

Telesail,

Thanks. That's what I needed to know. As I'm in the very early stages of exploring whether or not this is even worth looking at, I'm not yet to the point where I need to involve my CPA. For now, I will assume I pay taxes on the 9% as income but not on the use of my own boat. You bring up a good point about owner time on another boat though....I need to figure out if that could be considered income. 

Do you mind sharing what charter company you are working with?

Take care.


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## Telesail (Dec 28, 2011)

I will PM you as I am not sure it is appropriate to promote any particular company where I have an (admittedly indirect) financial interest


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## The Traveler (Jul 1, 2017)

Great, thanks.


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## Rocky Mountain Breeze (Mar 30, 2015)

Beware that any deductions you take for depreciation will be recaptured when you sell the "investment". I have been involved in solid ground rental property for 25 years and have come to the conclusion that if you ever wish to sell an asset which may be eligible for depreciation it is a fools game unless you are in the highest tax bracket. As the old oil change commercial said "You can pay me now or you can pay me later".........


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## Turnin Turtle (Jun 25, 2016)

The only guaranteed income program is.... GET A JOB.

These "put your money here, we'll guarantee you an income" deals are all scams.


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## The Traveler (Jul 1, 2017)

Guaranteed Income probably is a misleading name for the program because it lures people into thinking it's an investment or business opportunity. I am not interested in this as a business or a way to obtain deductions. I'm simply looking at this as a possible way to help pay for a boat and get some great charter time around the world. 5 years out from retirement I can purchase the boat, use the program's 9% "income" combined with my own payments to pay off the 10 year loan in 5. So at the end of the 5 year program I'll retire and have the boat paid for. 

There's a lot to consider, and this is 10+ years down the road. I started this thread to just ask if anyone had experience with the tax consequences of the guaranteed program. 

Thanks


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## The Traveler (Jul 1, 2017)

Telesail,

PM received. Thanks. Unfortunately I can't send a PM reply until I have a higher post count.


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## capta (Jun 27, 2011)

In any bare boat company the highest paid employee or sub-contractor is the fiberglass guy who can make even structural damage disappear like magic. Just thought you might like to know that.


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## hellosailor (Apr 11, 2006)

Traveler-
If the folks offering the program can't put you in touch with past customers to get some answers, and they don't have some information on tax consequences and situations available for prospective customers...I'd say you have to ask why that has been omitted.
If you put the up-front money into an ETF and collected maybe 10% per year, yes, there are other risks. But what is the assurance behind the income program? If they go broke, you get back what, your possibly very used boat? Risks either way.
Something you need to discuss with whoever does your taxes or finances, and considering the risks, worth paying for a consult on this.

Turtle-
Your funny! A JOB? Hell, that's not guaranteed income. This isn't the 1950's anymore. A job means you might be paid, or you might be told you are superfluous now, don't come back after lunch. Civil service is about the only "job" left that offers a reasonable chance of a pension and retirement all from one employer, and even then you can get laid off.
JOB? The championship poker players will all tell you, they've got better odds.


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## Minnewaska (Feb 21, 2010)

Rocky Mountain Breeze said:


> Beware that any deductions you take for depreciation will be recaptured when you sell the "investment"......


True, unless you repurchase a similar asset within a specified time. Your old tax basis carries over to your new asset. This is how the big charter fleets sell you a new boat.


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## aeventyr60 (Jun 29, 2011)

The OP might want to look into better established programs with worldwide availability of charter yachts. Check here:
https://www.sunsailyachtownership.com/intelligent-yacht-ownership

Also any of those tax advantages won't be available to you unless you make a whole lot more money or catch a bunch more fish.


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## Rocky Mountain Breeze (Mar 30, 2015)

Minnewaska: Your advice only applies if you are doing a 1041 exchange which carries its own costs......


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## The Traveler (Jul 1, 2017)

Thanks all but you're killing me....what part of "very early stages," "10 years down the road" didn't I make clear? I haven't talked to my CPA, my Lawyer, the company, or their former boat owners, (or even my wife yet!!) Heck, if I asked the company they'd say it's a great business opportunity that allows me to write off my house, my car, my cell phone, my kids braces, my dog food, all while making money and getting a boat for free, etc, etc. 

All I"m asking for here is if anyone has personal experience with the tax consequences of the guaranteed income programs as opposed to the partnership type programs. 

aeventyr60, I'm open to any charter companies. (remember....early stages?) But I'm looking at Dream Yacht Charters because they have a base near where I live so I might be able to take better advantage of the owner time. 

Thanks.


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## Minnewaska (Feb 21, 2010)

The Traveler said:


> ......All I"m asking for here is if anyone has personal experience with the tax consequences of the guaranteed income programs as opposed to the partnership type programs........


One's personal experience would not be applicable to everyone. You're gettting the quality input that you paid for.


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## The Traveler (Jul 1, 2017)

Minnewaska said:


> One's personal experience would not be applicable to everyone. You're gettting the quality input that you paid for.


Although not perfectly applicable, I found throughout life that I learn a ton from others' personal experiences, successes, failures, and mistakes. Putting a yacht into charter management may be one of those mistakes I avoid based on learning from others. This is why I love forums such as SN. I can ask a question and receive feedback from people around the globe. I find these forums are most valuable when a poster asks about personal experience and the respondants actually have personal experience with that issue.

Back to the question at hand, this isn't that complicated. If you were to ask "I am looking at purchasing a rental property. Are rental receipts usually considered taxable income?" I would answer "Based on my experience, the rent I receive from my tenants is taxed as income." I wouldn't answer "Rental properties are a bad idea. You should put your money into ostrich farms instead."

This is where I would put a sarcastic smiley if I could find one.....:wink

In all seriousness though, thanks for the input. Happy Sailing.


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## aeventyr60 (Jun 29, 2011)

All the old farts have answered to the best of our abilities which includes no one with any actual experience. However, with what I'm seeing in SE Asia you will want to be purchasing/leasing/buy back/ chartering for income a Catamaran...


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## The Traveler (Jul 1, 2017)

That certainly seems to be the current trend. It'll be interesting to see if there is much of a market for chartering mono's in 10 years or so when I look at making the plunge.


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## hellosailor (Apr 11, 2006)

traveler, I suspect that part of the answer will lie with the question of exactly how the contract is structured. You may be buying a boat, or financing the purchase of one (separately or as part of the deal), and leasing it to the "charter" company for an agreed monthly lease payment. Or you might be somehow selling it to them, with those monthly payments being partly a "finance" fee. Lord only knows, there are some clever accountants out there, no real telling how the deal is structured without seeing the contract. If the deal is an honest one, they should have no problem sending you a copy of the contract that the use, so your accountant can go over it and render a properly informed opinion. Including little things like the question of who will be the title holder and what your options and actions can be if the company goes bankrupt, or fails to maintain the boat. And whether you're obligated to the people who have booked it, in the event you want or need to recover the boat early.


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## The Traveler (Jul 1, 2017)

hellosailer,

At this point I am researching all options and open to everything. The plans I am currently most interested in are set up where I own the boat and hold (or my bank holds) the title. My contract with the charter company basically gives them control over the boat in periods of one year at a time. They assume all costs related to maintenance and chartering and make all the profits. They simply pay me 9% of the cost of the boat every year - paid out monthly. 

There are other programs where the boat owner enters into more of a business relationship with the charter company. The owner pays all costs for the boat and pays the charter company a percentage of all charter income. This is more flexible, and has some tax advantages for the owner (business costs, etc). 

Plenty to consider, but plenty of time to consider it. 

Take care.


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## Minnewaska (Feb 21, 2010)

Form over function. They are both businesses. You simply have to decide if you are trying to maximize your tax benefits, which have consequences identified above or are just trying to offset some of your incremental business expenses and don't want the depreciation deduction. Whether you set this up as it's own company or just file as schedule C income will have pros and cons that require more info about the rest of your life. Would this be passive income or are you full time in the marine industry already, for example. You need an accountant. For that matter, it's almost certain the tax laws will be different ten years from now. 

Regardless of the tax treatment, your return is generally proportional to your risk. More upside, as well as downside, to non-guaranteed income. Focus on your goals first, taxes second (maybe fifth).

I think you need to start by getting real clear why you want to do this at all. Do you want to be in the boat rental business? I know you do not want your pride and joy of a boat to be rented to others. If you do this, the boat must have no more meaning to you than a new hammer you just bought at Home Depot and lend to every stranger, who abuses it when you're not using it and you throw it out when you need another.


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## The Traveler (Jul 1, 2017)

Minnewaska,

You've nailed it. Especially the idea of other people using my boat. That's going to be tough because our boats have always been almost a member of the family. I'd have to go into this kind of arrangement with the mindset that, although I may be purchasing a new boat, in reality I'm buying a heavily used boat in 5 years (in theory, professionaly maintained) and the charter company helped me pay for it as well as gave me 5 years of charter vacations around the world. 

The reason I'm even considering this is because it may be a way to purchase a boat we can cruise on full time, or at least extended periods of time, when I retire. We live on the water currently and between my little boat, and the amount of time I get to race/cruise on other peoples' boats, there's no need to take on the expense and work of owning a larger boat today. And for my wife to enjoy extended cruising in retirement I know it's going to take a large boat, perhaps a nice catamaran. These are beyond what I would be comfortable financing in retirement. So the idea is, purchase the boat 5 years out of retirement and put her in charter. Use the 9% payments in addition to my payments to pay off the loan in 5 years. Then, when I retire, the boat will be paid for, and we enjoyed 5 years of charters around the world. (I understand there are all sorts of arguments about whether this is a good idea, or if I should just keep the money invested for that 5 years and purchase a nice used boat when I retire. Good discussion but not the purpose of this thread.)

I don't foresee myself wanting to run a charter business which is why I'm mostly interested in the guaranteed income programs. 

For now, I'm just running ballpark number to see if this could possibly fit into my retirement planning. Until I get more serious about it and involve my CPA, I will assume the 9% payments are schedule C income and taxed accordingly. There may be some deductions related to the program but if I can't afford to do it without the deductions then I'm not interested in doing it. 

Take care.


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## hellosailor (Apr 11, 2006)

"the idea of other people using my boat."
That's wrong thinking. Get used to the fact that you will be "renting" the same hotel room as 45 other couples do, every year for five years. You're buying a time share, and even if you have the title, it won't become "your" boat until that program is over.
Maybe you like paisley suede upholstery. The charter company says no, catholic school plaid is more popular. Guess what you'll be getting, if you want business?

If this is going to be out of the US, there may also be tax advantages to putting it into an offshore corporation, so it isn't taxable income at US rates for you. Something that can be legal tax avoidance, if the income can be kept segregated. 

Income can be funny that way. Folks looking to retire (and not afraid of cold weather) go "Oooh, New Hampshire has no income tax!" and what they miss is the 5% tax on unearned income from investments and retirement accounts. Ooopsie, for a retiree trying to live off a nest egg? Yeah, "no" income tax is really 5%. But I'm told there are perfectly legal ways around that, too. Just not ones that are discussed too often.

Just make sure to have plans in place, in case the company goes broke 2-1/2 years into things, and you've got no more income (plus transport bills?) and a dozen families demanding to get the charter time they paid for. And willing to place liens on the vessel to get that. Business insurances?


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## TakeFive (Oct 22, 2009)

Would you ever buy a 5 year old boat from a charter company? You might want to consider this question separate from all the tax questions, because in the end you'll end up eith a boat that has been beaten up and patched with band-aids for five years. 

Since you live near a charter base, it might be a good idea to look at what their five year old boats look like.


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## The Traveler (Jul 1, 2017)

TakeFive,

Initially I would've thought no way. I assumed the boats would be beat up and "patched with band-aids" as you said. You may be right, but from what I've found so far, this isn't necessarily the case. I've found that most people who tell me the boat will be junk after 5 years have never actually owned a boat in one of the Tier 1 charter company fleets. I've spoken with plenty of people who've said the arrangement worked out quite well, provided you know going into it what to expect. I have friends who've chartered several times through DYC and another one of the larger companies. They've all said the boats were in very reasonable condition. A diver inspected the hulls as soon as they returned to the charter base. 

I also regularly walk the docks at one of the bases near me and the boats, at least from the dock, appear to be in just fine condition. Obviously I can't see beneath the surface, but the rigging, biminis, lines, fiberglass, electronics, etc, all seem to be in just as good of condition as any other used boats. I'm sure you can walk the docks in Rock Hall and find plenty of 5-10 year old used boats that are beat up and poorly maintained. Is it possible a 5 year old heavily used but regularly professionally maintained charter boat is a decent option? Is it possible a beautiful 5-10 year old boat purchased from a private party could be a lemon with all sorts of hidden problems? I helped a new owner deliver his impeccably maintained used sailboat a few weeks ago. The surveyor couldn't say enough good things about her condition. Despite the beautiful condition we still discovered multiple problems during the delivery that will need repairs. Charter or not, any used boat purchase is risky. 

One of the owners I heard from had his boat in a guaranteed income program. After finishing her term, the company had to return her to reasonable condition. He was able to bring his own surveyor along to inspect before and after repairs to ensure the boat was in agreeable condition per the contract prior to receiving her back from the charter company. 

I am far from concluding this is a good idea. It very well may not be. But that's not the purpose of my question. It'll take much more than a forum to determine that. I posed my question to see if anyone had any experience specifically with the guaranteed income programs and income taxes. 

Until I can afford to purchase my brand new, under warranty, dream boat, (which I can't) this may be a way, although less then perfect, to obtain a boat in which we can do some long-term extended cruising. Not to mention 5 years of valuable chartering around the world as part of my owner time. 

Thanks again for all the replies.


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## davidpm (Oct 22, 2007)

The Traveler said:


> TakeFive, The surveyor couldn't say enough good things about her condition. Despite the beautiful condition we still discovered multiple problems during the delivery that will need repairs. Charter or not, any used boat purchase is risky.


Just out of curiosity what kind of problems did you find?


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## Minnewaska (Feb 21, 2010)

The Traveler said:


> ......Until I can afford to purchase my brand new, under warranty, dream boat, (which I can't) this may be a way, although less then perfect, to obtain a boat in which we can do some long-term extended cruising.....


I don't think this is good motivation, unfortunately. You'll never see a brand new dream boat. I once chartered a boat on her third voyage ever. The corner of the cockpit table had already been broken off and glued back on by previous crew. Several other things were inop.

When you get her back in 5 years for your world cruise, you'll need to spend some real money on her. She won't be fitted for that kind of cruising, such as solar or wind gens. While systems may be operable and properly maintained, several are also likely to be near the end of their useful life. Critical systems need to be reliable in remote places.



> Not to mention 5 years of valuable chartering around the world as part of my owner time..


This is a reasonable benefit of getting into fleet ownership. These folks rely on the owners for the capital investment you are contemplating, so I'm told they are treated pretty well.

On a related note, are you contemplating the need for the upfront down payment and cost of your accountant and lawyer?


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## hellosailor (Apr 11, 2006)

An example of wear. Some years ago, pre-internet, I called J/boats because the gooseneck on a J/24 was just about worn through. Yes, big casting, soon to be worn through. (Aluminum over a steel pin IIRC.) And since it was lunch time, they actually put one of the J brothers on the phone. (Impressive customer service!)

He said something along the lines of "You've what? On a what? And that's how old? Oh, it's one of THOSE boats? Well sure, you guys put more wear on them in one year than we see in ten years of private ownership. Yeah, you can get a new one from..."

So things you might never think to look at, that normally just don't wear out, can be eaten alive when a boat is in constant daily use. Pretty much the same way that offshore cruising and circumnavigating are going to wear things out, when the typical boat that goes out four or six days a month just isn't going to be consumed the same way.

Given enough lead time, it might be reasonable to ask a charter operation if you could see just what kind of inspection and refurbishing they do before they release boats from their fleet. Some actually may contract to do that. Others? Will just wash it down and fix what's broke. Or pass it on the the "5 to 10 year old" operator.

Famous last words: "A good surveyor woulda caught that."


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## GTOM (Mar 7, 2017)

I don't know how much depreciation the US tax man allows, but looking at the 5 year old chartered boat prices, it is certainly more than 9% a year. Especially if you consider some boat show or any other discounts which get you the new boat 10+% cheaper. Moreover, 2nd hand prices you see on 5year old worn-off charter boats are listing prices, you don't know how much were they actually sold for. All in all, your virtual "income" is probably halved even before the tax man touches it (and of course he wants to touch the full amount)...

I briefly considered the option, but abandoned for many reasons. 

First the financials, even rental could cost less especially during the lowish-seasons where the charter company usually puts the owners weeks.

Second, If I wanted to keep the 5year old boat I'd need to invest heavy $$$ on repairs (see Cheeky Rafiki...), new sails, new engine.

Third, charter companies like awkward layouts, like putting 3 heads in a 40'-er. Definitely not a boat I am interested to keep...

And on top of that even the tax administration wants to climb into my pocket - no, thanks.

The only realistic offer I saw came from Turkey, I could buy a boat at 55% upfront payment (that 5x9% income "payed" at the purchase, saving me the capital costs of a significant portion of the price). No global network though and the political situation is quite messy = no deal.


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## The Traveler (Jul 1, 2017)

Davidpm, 

Mostly electrical issues. 

Minnewaska, the need to bring a boat up to snuff for long term cruising will probably be the case with almost any used boat, no?


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## The Traveler (Jul 1, 2017)

GTOM,

Great points and questions. And you are correct, the layouts can be less than ideal. For example some require cats to have 4 cabins vs the 3 cabin owner's version if she's in the guaranteed income program. There's usually more flexibility with some of the partnership options though.

DYC has a 55% program at some locations, with reciprocal owner's use at their bases around the world. But with this program you own her jointly with DYC until the end of the program when you buy them out for $1.


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## GTOM (Mar 7, 2017)

I checked DYC, their pricing raised the alarm to take a deeper look at a few brokers. E.g. DYC offers a Dufour 412 for 312k$, while there are new offers on boats.com for <250k$. That difference is the income of half the charter period...

In an ideal world a chartered boat should at least provide free sailing to the owner. But at elevated entry prices and deep depreciation I think we are far from it. Doing all the maths properly including capital costs and realistic depreciation I am not even convinced that it's cheaper than 4-5 weeks rental (40-50k$ in the 5yr period for a 40' mono). And all this is expecting normal wear and tear, no bigger hidden damage.


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## The Traveler (Jul 1, 2017)

GTOM, 

You're right, that's crazy. Would make no sense whatsoever if their initial sales prices are inflated. 

I can't tell from your link because none of the 412's in the U.S. have prices listed, but are you sure you compared apples-to-apples? I received a detailed quote from DYC for a DuFour 350 Grand Large and their price included an upgraded engine, the Adventure Package, delivery to the US and commissioning. I haven't looked at pricing from other dealers but 194k with upgrades, delivered and commissioned seemed reasonable.


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## GTOM (Mar 7, 2017)

No, not 100% sure that everything is the same in the two offers, and correct I compared EU prices, which are closer to me anyway (btw add ~15k $ then your european boat is delivered to the caribbean). Still, the difference was simply too much, the cheaper boat should run without sails and engine to be on par... If you are buying a new boat you need to turn all those "contact us" prices to numbers.


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## Minnewaska (Feb 21, 2010)

The Traveler said:


> Minnewaska, the need to bring a boat up to snuff for long term cruising will probably be the case with almost any used boat, no?


While you will may always want something more, I think there are many cruise ready used boats.


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## hellosailor (Apr 11, 2006)

gtom, US depreciation schedules can be complex. Depends on how the asset is classified, what the business is, whether rapid depreciation is allowed...and of course that all changes, or may change, annually as the tax laws change.

All part of why getting into any new business venture can become very painful, if you don't know the full ramifications of the business or don't hire professional help.

If there was gobs of money to be made chartering boats, plain and simple and without reading fine print, then the charter companies could just go to the bank for financing and buy them outright by themselves. The fact that they don't means there's got to be lots of speculation and a need for specific circumstances, for the profit model to work. (And for some folks, in some economies, sometimes it does.)


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## GTOM (Mar 7, 2017)

hellosailor said:


> gtom, US depreciation schedules can be complex. Depends on how the asset is classified, what the business is, whether rapid depreciation is allowed...and of course that all changes, or may change, annually as the tax laws change.
> 
> All part of why getting into any new business venture can become very painful, if you don't know the full ramifications of the business or don't hire professional help.


Actually I see a managed boat hard to justify even without ANY taxes...



> If there was gobs of money to be made chartering boats, plain and simple and without reading fine print, then the charter companies could just go to the bank for financing and buy them outright by themselves. The fact that they don't means there's got to be lots of speculation and a need for specific circumstances, for the profit model to work. (And for some folks, in some economies, sometimes it does.)


Indeed. By chartering a boat, you effectively lend money to the charter company, and at the end they give only about half of it back. Even for that half you have to sell the boat. No wonder why don't they fetch the money from a bank . In a very lucky case (fair entry price, good resale price, little/no capital costs + you move to a tax haven) it pays half of your sailing IF you sail 4+weeks in expensive locations like Tahiti. However, it's too many "if"-s for my taste.


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## RegisteredUser (Aug 16, 2010)

hellosailor said:


> .....
> If there was gobs of money to be made chartering boats, plain and simple and without reading fine print, then the charter companies could just go to the bank for financing and buy them outright by themselves. The fact that they don't means there's got to be lots of speculation and a *need for specific circumstances*, for the profit model to work. (And for some folks, in some economies, sometimes it does.)


Good post.


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