Owning a racehorse can be the most exciting investment you ever make. But, it is first and foremost an investment. If treated like the business that it is, the IRS affords many of the same protections and write-offs as investing in real estate or other business ventures.
So, yes, it is a write-off! As long as you can pass the IRS Hobby Loss test (see below). If successful, there is a second test to determine when (and how much) you can write-down. Thankfully, it is generally accepted that investing in horse racing partnerships satisfies the Hobby Loss test.
Test #1 - Hobby Loss Tes
The IRS must first and foremost recognize your investment as a “legitimate business investment". As you can imagine, the IRS won’t blanketly allow taxpayers to write-off just any business investment. An activity for personal pleasure that doesn’t generate profits is not a legitimate business investment but instead classified as a “hobby”.
Per the IRS, the following factors, although not all inclusive, may help you to determine if your activity is an activity engaged in for profit or a hobby.
- Does the time and effort put into the activity indicate an intention to make a profit?
- Do you depend on income from the activity?
- If there are losses, are they due to circumstances beyond your control or did they occur in the start-up phase of the business?
- Have you changed methods of operation to improve profitability?Do you have the knowledge needed to carry on the activity as a successful business?
- Have you made a profit in similar activities in the past?
- Does the activity make a profit in some years?
- Do you expect to make a profit in the future from the appreciation of assets used in the activity?