Alpacas are a Huggable Investment, Here’s why Alpacas are a Great Tax Benefit!
What’s the perfect investment? If it exists, it would have large tax deductions so that Uncle Sam subsidizes part of your investment cost. It would generate income on a regular basis. It would allow compounding of your investment on a tax-deferred basis to help build up the asset value. There would be a classic supply/demand situation where prices are rising since demand exceeds supply. It would be insurable so that your risk of catastrophic loss would be removed. It would offer portfolio diversification outside of traditional investment choices like stocks, bonds, and real estate.
Guess what? Not only does that investment exist, but it has an additional investment benefit – it’s a fun, huggable, lovable investment. A lifestyle investment for those people tired of the fast track and the volatile investment markets.
Alpacas are the huggable investment as well as the World’s Finest Livestock Investment. USA Today wrote about alpacas as “The Investment of the ‘90s.” We think it is also the top investment of the new millennium.
Here are a few specifics on the investment merits of these beautiful, endearing creatures:
• Breeding stock can be depreciated over 5 – 7 years. Active owners can even use their losses (up to $100,000 until Fall 2004!) to offset other income while their herd is growing. There are even tax benefits available if you choose to invest passively and let someone else manage the herd, though the biggest tax savings come from actively involved management.
• If you have stud-quality males, you can charge breeding fees of $1500 to $3000 per breeding, further increasing your cash flow. It is not uncommon for a high quality stud to earn $20,000+ a year in stud fees.
• All the expenses directly attributable to the alpacas can be written off – including feed, barn, fencing, vet care, a portion of your property taxes, equipment, interest expense if you borrow to purchase, insurance costs, breeding fees, travel expenses to visit other farms, etc. You can often have your land re-zoned as agricultural land under the “Greenbelt Law,” further reducing your property taxes. Our own property taxes decreased by over 50% due to this exemption alone.
• According to industry research, a herd of five females and two males will typically grow to 126 animals at the end of ten years. Most females sell for $10,000 to $30,000 each and males can sell for even more if they are top stud quality (several have sold for over $200,000!). Your compounding is tax-deferred until you sell, and the gains are taxed at the lower capital gains rate.
• Since only one cria is usually born to a female each year, and it takes over 11 months to deliver, there can only be a steady but slow growth rate of available animals – especially since only half of the available animals are female. Females typically begin breeding at two years of age and can produce valuable cria until their late teens. The animals are very hearty and require little effort. They have no odor and they are “earth friendly” so many smaller operations start off with one or two in their back yard.
• Alpaca fleece is highly desirable and the animals are typically sheared once a year. The fleece can sell for $300 and up per animal, depending on what you do with it. It is a luxury fabric, soft and silky, warm and light weight, much warmer than wool, light as cashmere, and highly sought after. If you turn it into a finished sweater, blanket, or shawl, it can sell for multiples of this. That means a $15,000 animal can be depreciated in value by a several thousand dollars a year, and then generate another 2-6% return on their fleece each year. In addition, if every other cria is a girl, then your $15,000 animal can produce another potential $15,000 animal every other year (a 50% annual return!). It’s no wonder that industry studies show the average annual returns can be anywhere from 20-40% a year. As investment advisors, we hesitate to even throw out numbers like this because they sound too high, but the fact remains that you can make double-digit returns from the tax benefits alone!
• The animals are registered and their pedigrees documented by DNA testing. No further registered imports from South America are being accepted so the market is closed to new animals and bloodlines. It will be many years until the U.S. herd grows large enough to meet the international demand for the fiber.
• Lastly, the animals are insurable for their full value so the risk of catastrophic loss is minimized. Premiums typically average 2-3% annually for this insurance, so it is well worth the cost for peace of mind (plus it’s also a deductible expense!).
Truly, if a perfect investment does exist, it encompasses many of these benefits.
Call or e-mail us for more information on the investment merits of alpacas. We also recommend that you consult your own tax adviser to see how this can help your tax situation.