Buy a Yacht with your IRA | Frank Selden Law

Buy a Yacht with your IRA

So you want to buy a Yacht with your IRA. Awesome! I can show you how to do that. We set up a manager-managed LLC in your State of choice. The Member, your IRA, will appoint you as the manager. You transfer your qualified funds into an IRA held by a custodian that allows IRAs to invest in client managed LLCs (most do not). The IRA moves the funds to the LLC, the LLC buys the yacht. You may not be paid as the LLC manager, you may not work on the yacht or use it for personal trips, but if you know the industry, you know the huge potential gains for your IRA that can be realized.

Photo by Eugene Chystiakov on Unsplash
Photo by Eugene Chystiakov on Unsplash

How do you anticipate growing your IRA’s value with yachts?

Whether you want to lease your yacht or sell yachts for a profit, your IRA will likely be subject to unrelated business income tax (UBIT).  This requires your IRA (not the LLC) to file a tax return claiming the business income, using the LLC assets to pay the taxes. UBIT does not give you any credits against ordinary income tax due on withdrawals. 100 percent of future withdrawals will still be taxed at ordinary income tax rates at the time of distribution.

You may have heard that yachts can rent for more than $100,000 per week. Yes, they can. The bigger the yacht, the bigger the crew required thus increasing your expenses. Still, it does not take many rental weeks per year to realize a significant gain. Besides, it may not be the only reason why you want to buy a yacht with your IRA.

Your yacht as a taxable distribution from your IRA

One of the lesser-known ideas about purchasing a yacht with your IRA is that you are allowed to take your yacht as a taxable distribution from your IRA. Perhaps you want to retire to life on the sea. If you rent your yacht until you want to retire, and are at least 59 1/2 at the time, you can distribute your vessel to yourself from your IRA as a taxable event, along with enough accumulated cash to pay the taxes. You essentially acquire the boat of your dreams without any funds out of pocket. I can show you how to do that as well.

This concept requires you to walk a tight line through prohibited transaction issues. There is your boat, in the sunshine, sailing through the waves to incredible snorkeling or scuba locations. And… you are not on it. Does that work for you? Can it work for you if you are netting six figures for your IRA every year? When you buy a yacht with your IRA, the IRA owns the vessel. It is NOT your boat and you are prohibited from transacting with your IRA’s assets. Just wait. Your turn will come. In the meantime, you are welcome to use any other boat in the world.

Financing your yacht

When you buy a yacht with your IRA, you use your own assets. If you need financing to purchase the vessel you desire, you and any other disqualified person are not allowed to personally guarantee the loan. Non-recourse loans are tough enough to find for real estate these days. I am not aware of a financial institution that creates non-recourse loans for boats. Seller financing might be available. Financing any IRA purchase results in UBIT for the portion of the income that is attributable to the financing, although this does not double the taxes if that same income already pays UBIT as business income.

IRA custodians rarely file tax returns for the IRAs. This is a duty placed on you as the LLC manager / IRA owner. You need a good CPA familiar with a UBIT form. I don’t want to take the wind out of your sails, but getting this done right to avoid disqualifying your IRA takes discipline and diligence.

If you want more information, give me a call. Better yet, let’s shop yachts together and chat on the water.

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