On May 1, 2007 Senators Mitch McConnell (R-KY) [pictured], Jim Bunning (R-KY) and Blanche Lincoln (D-AR) introduced the Equine Equity Act of 2007 (S. 1251) to encourage investment in the horse industry.

Federal tax law currently treats the equine industry differently than other businesses by requiring that horses be held longer than other assets to be subject to capital gains. The new legislation would make horses eligible for capital gains treatment after 12 rather than 24 months. It also places all racehorses in the three-year category for depreciation purposes (currently horses started in training before 24 months of age are depreciated over seven years.)

“Nearly 2 million Americans own horses, either for racing, showing or recreational purposes,” noted McConnell (pictured), as he addressed the U.S. Senate. “While the popular image of horse owners might focus on Millionaire’s Row at Churchill Downs on Derby Day, the facts tell a different story. Only about one-quarter, 28 percent, of U.S. horse owners have incomes greater than $100,000. More than one in every three, 34 percent, of horse owners have an income of less than $50,000.

“Like many businesses, outside investments are essential to the operation and growth of the horse industry,” McConnell added. “Without investors willing to buy and breed horses, it is impossible for the industry to thrive. Unfortunately, there are several unfair, unwise provisions in the tax code that discourage investment in the horse industry.”

For most owners who breed to race or show, 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 by allowing horse owners and breeders more flexibility in selling and marketing 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.

Racehorses eligible for depreciation over three years
Race horses are currently depreciated over either three or seven years, depending on their age when “placed in service.” A horse is deemed to be “placed in service” when it begins training, which is usually at the end of its yearling year. Racehorses 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).

In other words, 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 change would provide for a more equitable depreciation schedule for race horses, one that better matches the realities of the situation.