After a successful racing career, a horse named Ronnie's Revenger was retired for stud duty. As his offspring began winning races, the horse quickly became one of the most talked about young sires in the industry. Within several years, the stallion began commanding stud fees in excess of $100,000. Moneymaker Farms decided to divide ownership of the stallion into 20 fractional, undivided interests or shares. The owners retained 11 of the shares and began marketing the remaining nine, each of which was offered for $2 million. The owners of the farm were concerned with the amount of tax gain that they would recognize upon the sale of each share. After consulting with their controller, they realized that every share sale would generate over $700,000 in tax.
The Accruit Solution
1031 exchanges can also be applied to the sale of a fractional, undivided interest in a horse. (However, an LKE does not apply to a sale of a security or a partnership interest.) Moneymaker Farms confirmed with their tax advisors that the sale of the fractional interests could potentially qualify for tax-deferred exchange treatment. The controller contacted Accruit prior to selling the fractional interests in order for each sale to be structured as part of a 1031 exchange.
By structuring each of the nine fractional interest sales as tax-deferred exchanges, Moneymaker Farms was able to save over $6 million in tax – cash that was then reinvested in their thriving operation.
* Moneymaker Farms is closely modeled on an actual Accruit client.