Latest / The High Net Worth Podcast with Fexingo: Wealth Management, Tax Strategy, and Affluent Finance / How Ultra-Wealthy Families Use Yacht Chartering for Tax Strategy
Transcript
- Lucas: Luna, I want to talk about something that sounds like a loophole but is actually a pretty well-defined section of the tax code: how ultra-wealthy families use yacht chartering as a legitimate tax strategy. Luna: Yacht chartering — as in, renting out your superyacht to offset the cost of owning it? I've heard whispers about this, but I've never seen the actual numbers. Lucas: Right. The key is Section 280A of the Internal Revenue Code — the same section that covers vacation homes. If you charter your yacht for fewer than 15 days a year, the income is tax-free. That's the first and most famous rule. Luna: Fifteen days of charter income, no tax at all? That sounds almost too good to be true. Lucas: It's real. But most serious owners charter more than 15 days because the economics of a 60-meter Feadship demand it. Once you cross the 15-day threshold, the income is taxable, but you can also start deducting expenses — crew salaries, fuel, dockage, insurance, depreciation — proportionally based on charter days versus personal days. Luna: So how do they keep it from triggering a hobby-loss argument? The IRS loves to disallow deductions when an activity looks like a hobby. Lucas: That's the critical question. Under Section 183, the hobby-loss rule, if you show a profit in at least three out of five consecutive years, the activity is presumed to be a business. Many owners target exactly that — a small profit in year three, even if the first two years show losses. And the charter contracts have to be arms-length, with a professional charter management company, not just renting to friends at a discount. Luna: What about the personal-use limitation? I seem to recall there's a cap on how many days the owner can use the yacht for personal enjoyment. Lucas: Yes. If personal use exceeds the greater of 14 days or 10 percent of the charter days, the yacht is treated as a personal residence under Section 280A — and your deductions become limited to just the mortgage interest and taxes, not operating expenses. So the typical structure is: charter the boat for, say, 60 days a year, keep personal use under 14 days, and you can deduct 60/74ths of all expenses. That's a massive deduction, often in the millions. Luna: And the crew salaries — those are proportionally deductible too, even though the crew works year-round maintaining the yacht? Lucas: Yes, but only the pro-rata share. If the yacht is chartered 60 days and used personally 10 days, with the rest idle, you deduct 60/74ths of crew costs. The IRS has accepted this allocation in private letter rulings, though it's always a bit of a grey area. Luna: What about depreciation? That's usually the biggest deduction. Lucas: Depreciation is a huge piece. A new build can cost $50 million or more. Under MACRS, a yacht is depreciated over 10 years — or sometimes 7 if you can argue it's used for entertainment. But there's a catch: if you ever sell the yacht for a gain, you have to recapture all that depreciation as ordinary income. So it's deferral, not permanent avoidance. Luna: Deferral is still valuable if you're in a high tax bracket now and expect to be in a lower one later, or if you just never sell. Lucas: Exactly. And many owners don't sell — they pass the yacht to a trust or a family LLC. There's also the net investment income tax to consider. The 3.8 percent surtax applies to passive income, and charter income is definitely passive. So an owner in the top bracket could be paying 40.8 percent on that charter revenue. Luna: But wait — if the charter income is passive, can they offset it with other passive losses? Like from a real estate partnership? Lucas: Yes, that's exactly how it works. Passive income from chartering can be absorbed by passive losses from other activities. That's one reason wealthy families bundle yacht charters into a larger family office structure that also holds real estate or oil and gas partnerships. Luna: So the yacht becomes part of a portfolio optimization tool, not just a toy. Lucas: Right. Now, there's also an alternative: the tonnage tax regime. But that's more for commercial shipping companies, not private yachts. A few ultra-wealthy families have tried to qualify by chartering their yacht to a related commercial entity, but the IRS has cracked down on that. Luna: I recall a 2022 Tax Court case — what was it, Golinelli? The IRS disallowed deductions for a yacht that was chartered mostly to the owner's own company for corporate entertainment. Lucas: Golinelli is the perfect cautionary tale. The owner chartered his yacht to his own S corporation for 60 days, and the IRS said — wait, that's personal use disguised as business. The court agreed. The lesson is: third-party chartering is safer. If you're chartering to your own company, the IRS will reclassify those days as personal. Luna: Let's talk real numbers. What does a typical strategy look like for a $30 million yacht? Lucas: Sure. Assume a $30 million build. Depreciation: roughly $3 million per year under MACRS. Operating expenses: crew, fuel, dockage, insurance, maintenance — call it $1.5 million annually. If you charter 60 days at $100,000 per week, that's about $850,000 in charter revenue. Your deductible expenses are 60/74ths of the $4.5 million total, or about $3.65 million. That generates a tax loss of about $2.8 million, which can offset passive income from other sources. Luna: So the charter revenue is almost irrelevant — the real value is the deduction against other income. Lucas: Exactly. The tax savings at the top bracket are around $1.1 million per year. That's real money, even for someone with a $30 million yacht. Luna: But there's a risk: if the IRS ever audits and reclassifies your personal days, or decides the charter business isn't really a business, you could lose years of deductions. Lucas: Absolutely. That's why every serious owner uses a professional charter management company, keeps meticulous logs of personal vs. charter days, and documents the arms-length nature of every charter contract. Some even use a separate LLC for the charter business and maintain a separate bank account. Luna: And what about the Alternative Minimum Tax? Does that come into play? AMT disallows some deductions, like state and local taxes, but does it affect depreciation on yachts? Lucas: AMT uses a slower depreciation method — 150 percent declining balance instead of 200 percent — so the deduction is smaller under AMT. But many wealthy families are not subject to AMT because the exemption phases out at very high incomes, but the AMT itself can be triggered by large deductions. It's a complex interaction, and worth modeling before committing to the strategy. Luna: I've also heard that some owners use a 'yacht club' structure — several families jointly own a yacht and each buys weeks of charter time. Lucas: That's a fractional ownership model, and it has its own tax rules. Under Section 280A, if each owner's personal use is limited to their allocated weeks, and the rest is chartered to third parties, it can work. But it's trickier because the IRS might view the co-owners as related parties if they're family members. Luna: Let's zoom out. About 75 percent of the way through — and I've been thinking about this — you know, we cover a lot of strategies like this on the show, and we deliberately don't run ads on these episodes. Lucas: That's a choice we made early on. If our conversations have helped you think about a decision differently, or saved you from making a costly mistake, the best way to support that is through listener support. Luna: The link is simple: buy me a coffee dot com slash fexingo. It's a small gesture that keeps this ad-free, and we appreciate it. Lucas: Back to the yacht tax strategy — one more angle I want to touch on: the impact of rising interest rates on the decision to charter versus just keep the yacht idle. Financing a $30 million yacht at 6 percent is about $1.8 million a year in interest. That interest is deductible as investment interest if the loan is secured by the yacht, but it's subject to the investment interest limitation. With rates where they are in mid-2026, the interest deduction alone may not be enough to justify ownership without the charter income and expense allocation. Luna: So the math has shifted. A few years ago, when rates were near zero, the financing cost was negligible, and the tax deductions from chartering were pure gravy. Now, with higher rates, the strategy relies more heavily on the depreciation and operating expense deductions to produce a net tax benefit. Lucas: Exactly. And that makes proper structuring even more important. One mistake — like a single year where personal days exceed 14 — can blow up the whole deduction. Luna: What's your take — is this strategy likely to survive a future tax reform? The carried interest and step-up in basis rules get all the attention, but yacht charter deductions might be on the chopping block. Lucas: It's possible. The Tax Cuts and Jobs Act of 2017 didn't touch it, but the 2025 reconciliation bill considered limiting depreciation for luxury assets. I think the 15-day rule is too well-entrenched to disappear, but the hobby-loss presumption could be tightened. For now, it's a very real strategy used by dozens of families I've worked with. Luna: And one last thing — if you're not in the market for a $30 million yacht, are there any smaller-scale versions of this strategy? Lucas: Sure. The same rules apply to a $500,000 40-foot sailboat, as long as it has sleeping quarters, a galley, and a head. You can charter it through companies like Sailo or Boatsetter, keep personal use under 14 days, and deduct proportionate expenses. It's the exact same code section. Luna: So the strategy scales down. Good to know. Lucas: It does. And it's a reminder that the tax code often rewards the most deliberate, documented behavior — regardless of the size of the asset.