In Search Of Nordhavn #3

John, since we are making this an educational thread, are you using an engine surveyor? I realize there is only one engine and it is "relatively" inexpensive as it relates to the cost of the rest of the boat. So you may be accepting the risk of not using an engine surveyor.

Just for people reading this, if you are buying a boat with bigger engines and maybe there are two of them, it is usually a good idea to use an engine surveyor....another expense in the buying process.

bligh said:

John,
What is the purpose of setting up an LLC in regards to a boat purchase?

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An LLC offers a layer of protection and flexibility to the vessel owner. The LLC owns the vessel as its sole asset, and (if there is litigation against the vessel) the assets of the LLC are the only things that can be attached.

If there is a multiple ownership scenario, owners can buy into or sell their interest in the LLC without vessel titling/registration being affected, because the LLC owns the vessel.

THere may be some tax advantages of an LLC, and that would best be taken up with the tax professionals.

I can provide a bit of an answer to the LLC question. As a tax attorney who deals with boat owners, this issue comes up quite a bit. For a boat owned by a person or a married couple, I do not find many, if any, benefits to an LLC. Peter mentioned the chief one-limitation of liability. As he noted, in general any claims against the LLC are limited to the assets of the LLC, thus sheltering personal assets from any liability claims. That said, that is not a given. Someone with a claim against the LLC can successfully convince a court that the normal corporate protections do not apply. While not easy to do, it can be done, it is a bit easier where the LLC owned by an individual or a married couple.

There are no real income tax benefits for an LLC owned by an individual or a married couple. For federal tax purposes. the LLC is ignored and all tax effect, good or bad, flow directly to the owners.

As also noted above, insurance may be a bit more expensive for an LLC than for a directly owned vessel. Peter can provide a better answer than I can.

The real benefit comes when the boat is sold. You have a choice of either selling the boat itself, or selling the LLC. By selling the LLC, you in effect transfer ownership of the boat to a new owner, but, in most jurisdictions, avoid sales tax on the sale (some states have an excise tax on stock sales) and you avoid a lot of paperwork hassle, i.e. documentation, etc. No new documentation is needed (although a change in ownership must be filed) as the boat is still owned by the LLC.

There is an administrative cost to having an LLC as well.

As Peter noted, if the boat is owned be several people, or is used in any commercial way, charter, etc. there are very substantial benefits to the use of an LLC.

If you are considering an LLC, a good tax advisor can give you more detail.

I have a C corp and was thinking of putting a boat in that. Not really for liability protection but in an attempt to depreciate the the boat and offset some income of the C corp. This C corp is not my main business.

Was thinking about using the boat as an office and expense the slip, insurance, bottom jobs, other expenses. This C corp generates a little income in the car financing business-- can a finance company have a boat for an office?

Anyone done something like this?

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cardude01 said:

I have a C corp and was thinking of putting a boat in that. Not really for liability protection but in an attempt to depreciate the the boat and offset some income of the C corp. This C corp is not my main business.

Was thinking about using the boat as an office and expense the slip, insurance, bottom jobs, other expenses. This C corp generates a little income in the car financing business-- can a finance company have a boat for an office?

Anyone done something like this?

Sent from my iPhone using Trawler

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I can answer that one, not as a tax professional but as a business owner that has consulted with his tax CPA.

I run a profit making company that is not related to the marine industry, nor can the boat be used as part of my business except as a remote office.

My CPA is a large boat owner as well, and is well versed with the issues at hand.

The costs of setting up and maintaining a remote office is 100% deductible as a legitimate business expense. In my case that included satellite communications equipment, cellular communications equipment, network equipment, computer, etc... including recurring costs for the service to support that equipment.

If I had a dedicated portion of the boat, say a cabin that was exclusively used to conduct business I could sign a lease agreement with my company for that space. The space could then be depreciated on a percentage of the purchase price of the boat. The problem is I do not have a space that is exclusive for business functions so we decided to not go that route. The rents would flow back to my personal income as unearned income, so its awash tax wise.

When I asked her if I could in any way write off moorage, maintenance, or any other boating expenses, she advised strongly against it. She indicated that if I owned a much larger business, and needed the boat to entertain prospective clients for example, that would be possible, but not at my business income level.

I asked her about doing some commercial shrimping (Yes Bret I asked about shrimping), or part time chartering as a way to incorporate my boat into a business plan, and write off the expenses.

I was told that the IRS uses a simple test to differentiate hobby from business. That test is that a legitimate business has to have a reasonable expectation of being able to make a profit.

THD said:

The real benefit comes when the boat is sold. You have a choice of either selling the boat itself, or selling the LLC. By selling the LLC, you in effect transfer ownership of the boat to a new owner, but in most jurisdictions, avoid sales tax on the sale

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As I said in post # 29....When you go to sell the boat, by selling the LLC the new buyer can save a ton in sales tax, thus making the deal more attractive.

SeaHorse II said:

As I said in post # 29....When you go to sell the boat, by selling the LLC the new buyer can save a ton in sales tax, thus making the deal more attractive.

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The OP seemed to imply it would save him taxes- what taxes is he referring to?

cardude-Kevin covered it pretty will, not much I can add. As with vacation homes, boats are a hot button item for the IRS. Any boat on a tax return, unless the business is a marine business, is liable to draw some enhanced scrutiny. Generally, as Kevin decided, the potential tax benefits are not worth the risk.

Response to question on purpose of LLC: I'm pleased to see all the talk about LLC ownership and everyone's willingness to provide information on the subject. I do not have anything to really add except that our reasoning is the layer of liability protection (subjective, yes) and the bonus at resale time. We believe we can sell the boat for a little more with an LLC especially if the buyer is from California. We have successfully used an LLC to avoid state sales tax on N4050 by taking the boat out of state for a specific period of time but that is not in the cards for us this time around. Will comment on the sea trial and inspection next.

For John, the LLC does makes sense on the sale issue. Many states on the East Coast, Florida and North Carolina in particular, have an upper limit on sales taxes on boats. Not only is that not the case out here on the Left Coast, but sales tax rates tend to be higher. For instance, depending on the local jurisdiction, here in WA, the sales tax rate can be as high as 10%. In Seattle, it is 9.5%. So, on a $1.5M boat, that sales tax bill is $142,500, it is collected when you go to register the boat (unless the broker/escrow agency has collected it as a part of the sale). Rates are similar in much of California. Being able to save a buyer that big hit can have a substantial effect at sale time!

The commonwealth of Virginia caps the sales tax for watercraft at $2000.00

N3 Sea Trial and Inspection

The following is an update on yesterdays activities. After meeting Jeff and his wife Pam for breakfast we drove over to the boat were we met Lee the inspector and the boat owner. Upon arriving the boat Lee went to work in the engine room for the next two hours followed by the lazerrette. This gave Jeff and I time to look over the rest of the boat with the owner. There was a lot to cover even on a smaller boat. Once Lee was ready we started the engine and drove across the bay at different RPM's and went through maneuvers. I was impressed with the boats handling (different then our N40's) and visibility. She tracked perfect and was responsive. Cooling temperatures and engine noise in the salon didn't change very much at even WOT. Nordhavn does know how to build a quiet boat. She handled different sea conditions as I expected. After we arrived the ship yard the boat was hauled out and the hull along with thru-hulls, transducers and propeller were all inspected - no findings. Bottom paint was less then one year old. We were back in the water within an hour and everyone left to return to owners slip while I departed to take care of personal business. Before I left I spent time with the inspector who explained what he found in the engine room. A few items that will be written up in his report and discussed with the owner. I suspect it will take everyone a few days to figure out how we handle the inspection report and requested to slip the contract close date two weeks so no one is rushing around and makes any mistake. When you think about it what is the rush? Having been down this road of boat ownership many time before, the one thing you do not want to do is make decisions based upon emotion. You need to keep a clear head when it comes to large purchases.

So in summary the boat performed as well as it looks. A true diamond in the rough considering its age. While one aspect of the sea trial did fall a little short everything else exceeded expectations and if the balance of the survey related items turn out OK then I think we will close the deal. So what has this adventure cost us so far? Insurance binder $150, Haul-out $270 and inspection $750. A small price to pay to insure your decision is made on solid ground. Hopefully these costs along with the time dedicated will help others thinking about buying a used boat in the future. If you are not serious you may not want to drop $1K and take up peoples time. I should add that I have already spent money traveling to Seattle three times and Oakland one time looking at other boats, made an offer on larger Nordhavn (not accepted) so I'm really into this purchase for around $4K all up over the past year. I will keep everyone posted.

I would also like to add that the current owner of the boat has been very forthcoming with know issues and very helpful though out this entire process. He is a real gentleman who took excellent care of the boat.

N4061 said:

I would also like to add that the current owner of the boat has been very forthcoming with know issues and very helpful though out this entire process. He is a real gentleman who took excellent care of the boat.

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John: I hope you are considering bringing her back to SunRoad as I am looking forward to meeting you and the boat.

Sunroad Marine

SeaHorse II said:

John: I hope you are considering bringing her back to SunRoad as I am looking forward to meeting you and the boat.

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Sunroad is on the top of our list and they have room. Also considering Kona Kia which we stayed once before and the Marriott Hotel Marina. Will let you know. thanks

Nice stuff John.
Thanks for keeping us informed and I hope you are in your next N soon

Cheers
Benn

Nice- I have some fond memories of the Kona Kai.....

Post Inspection / Sea Trial Update

A quick update to advise we received the inspection report along with appraised value of the boat. A few surprises with boat (one can consider this a good thing and why you pay for a high end inspector who knows the line of boats you are buying). Despite this boat appearing to be a 8 or 9 out of 10 he found things that Jeff and I missed. This is where things can get interesting for the buyer. Do you share the report which you just invested a $1K with the owner to help him understand what needs to be done with boat or keep it to yourself? I'm a honest person and not trying to hide anything so I authorized my broker to release a few pages of the report to the owner for his review. If this helps us meet in the middle then we have a deal, if not then we walk. At least I'll know I did the right thing and seller will know what he needs to do to keep his boat in top shape. I appreciate his time and effort on this transaction so I feel this is the right thing to do.
Probably the hardest thing to do is keep the emotion out of this phase of the purchase. After a year of searching and finally finding the right boat it is hard to walk away but all decisions need to be sound. Time will tell.....

bligh said:

John,
What is the purpose of setting up an LLC in regards to a boat purchase?

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You can domicile the LLC in a low tax state such as Delaware. The boat is owned by the LLC. That will cut taxes and limit liability against your other assets.

Moonstruck, I prefer not to comment on an LLC in Delaware since I'm not an attorney and despite our LLC's being established in Delaware I only understand the benefits living in California. Best to discuss with a tax attorney in your state. Good question that others should ask. Best of luck.

Don-there are no substantive advantages to incorporating in Delaware, especially in this case where the boat will not be a business, but for personal use. The advantages that accrue to Delaware for large corporations have much more to do with corporate governance law in Delaware than with taxation. Much weaker shareholder protections in Delaware. For federal taxes, it makes no difference whatsoever, especially for an LLC. The LLC in this case is ignored for federal tax purposes. Delaware has no state corporate income tax, but an LLC is not subject to a separate income tax in any event. As for liability, Delaware offers no more protection from personal liability than most other states. In any event, the liability law that will be applied will be the law of the jurisdiction in which the event giving rise to the liability occurred.

N3 Update - Not a done deal yet

Well the learning experience of buying a used trawler versus building a new boat continues. With the new boat you spec out the boat the way you want it over a period of months or years, then when your ready negotiate a price and wait for the boat to arrive. The only mention of price is limited to progress payments unless you decide to make changes (never a good idea).

Not the same with the used boat. Even after you and the seller agree on price there is the risk of having to renegotiate after the sea-trial / inspection and is where we find ourselves today. A week has passed and while I'm optimistic things will work out, the deal is not done. If I could provide any recommendation about this process it would be to keep the emotions out of the decision and not let anyone involved put pressure on you. Will keep you posted!

Emotions and $ don`t mix well. As you want to own it, there is already some "love" for the boat. You should sense when the seller has gone as far as he will, provided you don`t burn any bridges you can always backtrack your position if you have to. Sounds like you have it well under control, but if it all gets too hard you can say "yes", at any point.
I spotted a Nordhaven anchored at an inner harbour beaches recently. They are a such distinctive design. Hope it goes well.

N3 - Update "Not the planned ending"

For those that have been following our short adventure I'm saddened to report that our search for N3 will need to continue on. We decided not to complete the purchase of the boat we have been posting about. Out of respect for all parties involved I will limit our reasoning to price versus value as the significant issue.
The true lesson learned that came out of this remains the significance of the Sea Trial and Inspection (out of the water). While many boats can show pride of ownership, it is what you don't normally see that can sink the deal and / or the boat. Hiring an inspector who knows the make / model of the boat your interested in can make a big difference. Our inspector found many more items then Jeff and I were able to identify. While the list was not overwhelming it was longer then we were able to contend with at this time. These items combined with the age of the boat had me concerned with the "what next will require attention" fear factor. I'm use to starting out with a new boat where I know the condition and start preventative maintenance of everything aboard on day one. I figured it would take a year for me to baseline this boat. I was also concerned with the electronics having to be replaced soon at significant cost.
While we wil not rule out a used boat I think it will need be within a couple years old with little wear. I hope our experience helps others considering a used boat purchase in the near future.

John

John T.

I'm surprised that a vessel of Nordhavn's caliber would have such issues only visible after a haul out. You keep mentioning the 'age' so I understand the electronics concerns but since the only real identifying information is that it is an N43 among a number available, I would hope you would share the issues and not feel that you are singling out one owner.

Dave

C'est la vie. I congratulate you on your objectivity. Better not to buy with the heart than with the head in this case. Given that it's your third Nordhavn and first used machine, I think you had one up on most purchasers.

N3 Search

magicbus said:

I'm surprised that a vessel of Nordhavn's caliber would have such issues only visible after a haul out. You keep mentioning the 'age' so I understand the electronics concerns but since the only real identifying information is that it is an N43 among a number available, I would hope you would share the issues and not feel that you are singling out one owner.

Dave

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Dave, the boat is not an N43. My designation of N3 represents it would be our third Nordhavn. I'm not being specific on the model or year but as you can imagine with any boat over say 8 years will have a few issues. While the average buyer may not have strayed from this deal it just didn't add up for us today. Also, the issues we came across were not related to the haul out of the boat. They were noted in the engine room. Thanks

N4061 said:

. I'm not being specific on the model or year but as you can imagine with any boat over say 8 years will have a few issues. While the average buyer may not have strayed from this deal it just didn't add up for us today. Also, the issues we came across were not related to the haul out of the boat. They were noted in the engine room. Thanks

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Nevertheless, thanks for sharing the process.

C'mon John, at least tell us what size/length it was, just so we know where you are headed after two N40s. The way you've left it for now is a bit like saying you we're sussing out a CHB. They range from 30 to 48 odd feet. Nordys from 36 (I think), to 82' (again approx). Be fair...we wanna know how big..!
Mainly so we can get an idea what sort of step up you feel is appropriate to your present needs. Who knows, we might be able to alert you to prospects if we have an idea what's in your mind.

The boat I have now almost turned out that way. I walked away thinking that I had just spent $1500 on a boat that I was not going to buy. But I did I officially counter and my broker heard me mumble a figure and he took that figure to the seller without me knowing. The seller accepted and the broker came back to me with my fairly ridiculous lowball offer accepted. So I bought it and am getting her up to speed.

I guess my point here is, did you counter offer with all of the modifications in mind??? Or is it more of a time/hassle issue. I understand of it is time but you could try to lowball the guy. The upside is that you end up with the boat of your choice with a bunch of new stuff on it that you are aware of its quality....

I'm guessing that the "warts" were much more serious than expected & John, who's owned two Nordys previously, walked. No explanation needed.