Proven Strategies: The Ins and Outs of the Pinhooking Industry

[Wandering Eyes]

“Proven Strategies” is a new regular series in the TDN, presented by Keeneland. It is written by Len Green of The Green Group and DJ Stables, who won the 2018 GI Breeders’ Cup Juvenile Fillies with Jaywalk (Cross Traffic).

Although most of the readers understand the term pinhooking, let’s spend a moment defining how to approach it in a fiscally responsible way.

The majority of horses who are pinhooked are yearlings, purchased at public auction. They are then trained and eventually resold as “race-ready” two-year olds in training. The same practice can be done with weanlings to re-sell as yearlings or two-year olds.

The attraction that comes with investing in weanlings and yearlings is their ability to provide an opportunity for portfolio diversification in an area that historically and currently provides high returns.

Buying horses at reasonable costs and selling with high returns is the traditional strategy in pinhooking. The first step includes acquiring top prospects based on conformation, pedigree or family/sire popularity.

Of course, there are inherent risks involved in this sector of the market. Pinhooking is a risky venture due to the fact that not every young horse can handle the strict timetable of the breaking and training process. There are multiple factors that can put an investor in an unfavorable situation, such as their horse suffering an injury, not developing into a physically strong stature, not making the cut for a prospective sale or not performing well at the breeze show.

While you may not have full control in all areas of this business, you do have the opportunity to grow your knowledge in other profitable ways, including tax savings.

Big Tax Changes

Before the enactment of the 2017 Tax Act, the tax advantages of buying weanlings or yearlings were limited. Many buyers did not take any tax deductions and treated the purchase as inventory. Now the buyer has some flexibility.

Bonus Depreciation

Significant changes to the bonus depreciation rules were made to the Tax Code at the end of 2017. Businesses may now take 100% bonus depreciation on qualified property both acquired and placed in service after Sept. 27, 2017 and before Jan. 1, 2023. Yearlings are now eligible for bonus depreciation.

Expensing Under IRC §179

IRC §179 provides another avenue for taxpayers to accelerate the deduction of capital purchases that may be more beneficial than bonus depreciation. This allows taxpayers to deduct the entire purchase price of the property, up to a certain amount, that would otherwise be depreciable. Limits have also been increased to $1,000,000 for property placed in service in 2018.

How are Pinhooking Profits Taxed?

For most capital assets, the seller receives long term favorable tax rates if they hold the asset for more than a year. For pinhooking it is more complicated. You should consult with your tax advisor to see if it qualifies for the lower capital gains tax. If not, then you need to speak to an advisor who understand the nuances of the horse business.

Examining the Steps that Could Enhance your Pinhooking Profitability

We have studied a number of successful pinhookers and found numerous similarities in their approach. For example, when smart pinhookers go to buy yearlings at a sale, they follow a strategic plan of attack, including:

1. Physically examining almost every horse at the yearling sale. This is no easy task, especially at the larger yearling sales. The Keeneland September Sale has cataloged almost 4,000 yearlings over a 16-day sale.

2. The examination process entails: Physically examining the horse’s conformation. Since there are over 50 barns at the Keeneland sale, there is a lot of walking in addition to examining the horses. Talking to the consignors about any reserves, vet issues, personality traits, etc. Creating a “short list” of horses to have vetted or to look at a second time. Contacting a vet to review the x-rays and reports in the repository. Checking for “updates” on the horse’s family history, which could affect the price. And of course, confirming your credit line with the sales company.

After you follow these steps above, you should then meet with your advisors and develop a strategy, as well as a budget. It is important you also allocate this budget to ensure for the greatest potential in profit.

If you have any questions on how to approach the pinhooking business in a more financially responsible way, please reach out to one of our knowledgeable accountants specializing in the horse industry.

Don’t forget the first tax consultation is free for those who read this column! Happy Tax Season!

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