Horse owners Bob and Beverly Lewis, let tax laws impact their decision to buy horses.

Horse owners Bob and Beverly Lewis, let tax laws impact their decision to buy horses.

Skip Dickstein

Rebound in Horse Auctions Attracts Attention of Wall Street Journal

Recent changes in federal tax laws and their positive effects on Thoroughbred auctions has attracted the attention of the Wall Street Journal, which focuses on the horse industry in an article in the Wednesday, Nov. 19 edition.

Noting the Keeneland September sale produced the second-highest gross in the sale's history and the record prices paid for a broodmare and a weanling colt at the recent November breeding stock sale, the WSJ reported "if you want to see investment tax breaks in action, head to the local racetrack."

The article, written by Shailagh Murray, noted that the business tax breaks passed by Congress last year to jump-start the economy not only provided a windfall to the technology sector, but also to horse racing.

"Rep. Jim McCrery, a Louisiana Republican who helped craft both tax breaks, says he's not surprised at the surge in Thoroughbred prices," the article noted. "He jokes he wishes he had realized the impact for racing during the tax debate, so he could claim credit for it now." The WSJ noted that McCrery's district includes Louisiana Downs and that he is "one of the racing industry's big supporters in Congress."

"Owning a Thoroughbred is not too different from betting on one," the article stated. "Chances are, you're going to lose money. Most people go into the business because they love racing. But a favorable tax code helps."

The article explained how the tax laws impact horse racing ownership. "Investors who spend less than $400,000 in one year can take up to $100,000 as an expensing write-off. Under previous law, the limit was $25,000. Bigger spenders don't get the $100,000 write-off but are allowed a first-year depreciation 'bonus' of 50%, in addition to regular depreciation. There's no dollar limit to what can be claimed."

The WSJ cited the example circulated by the National Thoroughbred Racing Association of how the tax law works. "Say an investor pays $200,000 for several young horses. The first-year write-off, including deprecition, would come to $155,357. Assume another individual pays $500,000 for yearlings; that write-off would total $276,787 in bonus and regular depreciation."

The Journal cited prominent horse owners and breeders Bob and Beverly Lewis as investors who let the tax law changes impact their spending. The Lewises were among the leading buyers at the Keeneland September sale, although they had initially planned to sit out the sale. Bob Lewis cited the tax laws as the key reason for his change of heart.

In addition to the tax law changes, the article explained that other factors that could have boosted recent horse sales include turnarounds in the stock market and U.S. economy as well as accumulated demand stemming from the Mare Reproductive Loss Syndrome. "But the tax breaks enhance what horse people call 'churn,' the way money flows through the industry like a champion's bloodlines," the article said.

"The economic model changed drastically when the depreciation schedule changed," said Jim Squires, who bred Kentucky Derby winner Monarchos.

The article clarified one early misconception about the tax laws. "For awhile, investors thought the extra write-off applied to mares that were retired from racing and ready for breeding. The Internal Revenue Service recently issued a temporary ruling that it did not."

Buyer enthusiasm fueled by the favorable tax laws must be tempered with other variables, Lewis told the newspaper. "You don't let tax incentives influence you to the degree that you overlook the fundamentals of the horse. Remember what you're trying to accomplish here."