Legislative Issues & Policies - Equine Equity Act of 2007 Introduction Federal tax law treats the equine industry differently than others in several respects. Horses must be held longer than other business assets to be subject to capital gains. Race horse owners are required to make a decision regarding when to begin depreciating their race horses that is not based on the expected racing life of the animals. Legislation has been introduced in prior Congresses to correct these discrepancies. Legislation On May 1, 2007 Senators Mitch McConnell (R-KY), Jim Bunning (R-KY) and Blanche Lincoln (D-AR) re-introduced the Equine Equity Act (S. 1251). Under the federal tax code, gains from sales by individuals of property used in a trade or business, including horses, qualify for long-term capital gains and are subject to the maximum capital gains tax rate of 15%. Since the individual tax rate can go as high as 35%, the lower rate is a real advantage. Unfortunately, horses held for breeding, racing, showing or draft purposes generally qualify for the 15% capital gains rate only if they are held for 24 months. All other business assets (except cattle) qualify if held for 12 months. Passage of this legislation would end this discriminatory treatment of horses under the tax code and allow horse owners to enjoy the reduced rate upon sale after holding the horse for 12 months, rather than twenty-four. In order to qualify for long-term capital gain treatment, a horse cannot be held “primarily” for sale to customers. For example, a commercial breeder, whose principal activity is breeding horses and selling the foals or yearlings, is not eligible for capital gains treatment now on the sale of the horses because they are held for sale. In addition, a “pinhooker,” who buys yearlings and re-sells them as two-year-olds-in- training, does not realize capital gains on any gain now. But for most breeders, who breed to race or show (even if they cull some foals/yearling), or who race or show horses and sell them, or who race or show horses and syndicate them and sell shares, shortening the capital gains holding period to twelve months should be a benefit. Reducing the holding period by half would give these horse owners and breeders more flexibility to sell and market their horses. It would mean that every sale of a horse which is held for at least twelve months will qualify as a capital gain or loss unless that horse is held primarily for sale. Making All Racehorses Eligible for Depreciation over Three Years Presently race horses are depreciated over either three or seven years, depending on their age when “placed in service.” A horse is generally deemed to be placed in service when it begins training, which is usually at the end of its yearling year. Race horses over two when placed in service are depreciated over three years; if under two, they are depreciated over seven years. (A horse is deemed to be “over two” for tax purposes twenty-four months and a day after it is foaled.) Depreciation is a means of recovering the cost of property, including horses, used in a business through deductions of portions of the horse’s cost over a period of years. Generally, the recovery period approximates the estimated useful life or economic life of the property. Current law provides that racehorses that begin training at the end of their yearling year are depreciated over seven-years, even though most will not actually race for seven years. The legislation introduced by Senators McConnell, Bunning and Lincoln recognizes the unreality of this requirement by changing the tax code to allow owners to depreciate all their race horses over three years, rather than seven, regardless of when they are placed in service. The change would provide for a more equitable depreciation schedule for race horses, one that better matches the realities of the situation. Owners will no longer be required to depreciate their horses over seven years simply because they are placed in service at the end of their yearling year. The following chart, which shows what portion of the cost of a race horse is depreciated annually depending on the recovery period, illustrates the advantages of this clarification.
Obviously, this change would allow an owner to depreciate 62.5% over the first two years a horse is in training or races, rather than 29.85%. More importantly, this allows an owner to more accurately recover his/her costs over the period that the horse is likely to race. Congressional Action The bill has been referred to the Senate Finance Committee. On December 14, 2007, the Senate passed its version of the Farm Bill on a vote of 79 to 14. The $286 billion bill includes the Equine Equity Act. Senator Mitch McConnell (R-KY) offered this bill as an amendment to the Farm Bill and it was accepted without objection. This provision would: (1) shorten the capital gains holding period for horses from 24 months to 12 months; and (2) place all racehorses in the three-year category for depreciation purposes. The House passed its version of the Farm Bill last summer. The House bill does not include the Equine Equity Act and is quite different from the Senate Farm Bill in many other respects. Conference. A conference between House and Senate members will be necessary to work out these differences in the second session of this Congress, which begins in January. The bill that results from that conference will have to be passed by both the House and Senate and then signed by the President. President Bush has threatened to veto both versions of the Farm Bill as too expensive. AHC Position The AHC supports this legislation.
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American Horse Council
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