Opportunities and Requirements if You Own Foreign Assets – including yachts
February 17, 2021
With historically low interest rates in the US, maybe you’re considering investing abroad. Maybe your friend has already purchased that yacht in the Caribbean or that vacation home in France. Perhaps you thought about investing in financial assets in other countries but you’re not sure what your reporting requirements will be. Is it worth it? If that sounds like you, keep reading.
First things first: If you’re a US resident alien (e.g., a US tax resident or US fiscal resident), you have the same tax and financial reporting requirements as a US citizen. Even if you’re a citizen of another country, when you become a US fiscal resident, you become like one of us for tax purposes
In this article, we will focus on the two primary forms required for disclosing foreign financial assets: the FBAR, which is reported to the US Treasury’s Financial Crimes Enforcement Network (FinCEN), and Form 8938 filed with the US Treasury’s Internal Revenue Service (IRS). On a future article we will review the reporting regulations of owning businesses abroad.
We will also discuss here some tax benefits and reporting regulations of yacht and boat ownership, specifically the chartered ones.
Filing the FBAR
FBAR is short for Foreign Bank Account Report and is the term used for FinCEN Form 114. It is primarily intended to disclose foreign bank accounts and other financial instruments that are easy to move and difficult to track, not physical assets like a boat or real estate.
Form 114, Report of Foreign Bank and Financial Accounts, is necessary if:
- You are a US citizen, resident alien or a US corporation, partnership, LLC, or trust with
○ A financial interest in
▪ A foreign financial account (explained below)
▪ That exceeds $10,000 in aggregate value at any time during a calendar year.
It’s essential to understand the meaning of three of these terms.
- Financial account
- Financial interest
What’s a financial account for FBAR reporting?
The definition of financial accounts is broad and encompasses things such as:
- Bank accounts
- Investment accounts
- Insurance policies with a cash value
- Annuity policies with a cash value
- Shares in a mutual fund or other pooled fund
And that are located outside of the US.
What’s a financial interest for FBAR reporting?
A financial interest has a broad definition, much like a financial account.
The easiest way to have a financial interest in a foreign account is to be the legal owner or having signature authority. And if there is more than one owner, all the owners have a financial interest regardless of ownership percentage.
What if you have an investment account? Is there any specific requirement for that? Well, we are now moving to the interesting land of Form 8938.
What is IRS Form 8938?
While the FBAR is similar to Form 8938, there are key differences.
Firstly, for Form 8938 the filing threshold is higher.
Secondly, the IRS looks at foreign assets, in addition to foreign accounts.
Lastly, the IRS wants to know about some businesses and their revenue sources.
Higher filing threshold
Essentially, a US fiscal resident who files as single, with foreign assets valued at more than $50,000 on December 31 or valued at more than $75,000 during any time of the year must file this IRS form. Please check with us if you’re married or a US citizen living abroad for your specific thresholds.
Foreign accounts and foreign assets
The same types of FBAR financial accounts apply to the IRS form.
But the IRS goes further by looking at certain foreign financial assets to include ownership in a foreign entity or owning a foreign person’s debt., depending on the value of your part on those assets.
And, to the extent held for investment and not held in a financial account, you must report stock or securities issued by someone who is not a U.S. person, any other interest in a foreign entity, and any financial instrument or contract held for investment with an issuer or counterpart that is not a U.S. person. The most common types of the assets that must be reported include:
- Stock or securities issued by a foreign corporation;
- A note, bond or debenture issued by a foreign person;
- An interest rate swap, currency swap, or similar agreement with a foreign counterpart;
- A partnership interest in a foreign partnership;
- An interest in a foreign retirement plan or deferred compensation plan;
- An interest in a foreign estate;
- Any interest in a foreign-issued insurance contract or annuity with a cash-surrender value.
Reporting and benefits of owning yachts and boats
These days most of yachts are registered offshore. The most popular registries are in the Cayman Islands, Marshall Islands and St. Vincent . You may wonder why and that has a direct impact on your taxes. In most cases, flagging your vessel offshore enables to avoid taxes on the hull value. The savings can be significant, compared to the sales tax value. When your yacht or sailboat is not flagged in the US, it’s considered a foreign asset. And depending on how the vessel is titled, if under a personal name or a business name, reporting requirements will vary.
We know that the FBAR and FinCEN aren’t concerned about physical assets abroad. They want to know about foreign accounts and foreign financial agreements. However, if you have bank accounts in other countries where you receive your charter rental fees, you may have to report to FinCEN if your account meets the thresholds described earlier.
Like FinCEN, the IRS isn’t terribly interested in tangible assets you own under your personal name. They may become interested if a US company or a trust owns your boat that earns passive income – like charter rental fees.
There are provisions that can provide benefits on yacht purchases and also yachts for charter that are used for business purposes. To qualify for these benefits, the buyer must be an entity—corporation, partnership, or LLC. Some of these benefits may also apply to foreign-flagged vessels. Also, with yachts now able to be classified as second homes, you may be able to deduct the interest on your loan under the mortgage interest deduction portion of the new code, which allows homeowners to deduct interest on loans for their first and second homes. Contact us to understand if you qualify for any of the benefits.
If you ever have any doubt or concern about your foreign activities, consulting with a tax professional specializing in international tax is a must. Penalties for failing to report your foreign accounts or business activities can cost you more than your account or company is worth.
*For informational purposes only. Should not be used as legal or tax advice.