Some Racehorses Make Hay; Many Just Eat It

Owen Blicksilver owns a racehorse, so the New York Racing Assn. gave him a badge that reads “Owner Gentleman.” Blicksilver figures they must have run out of badges reading “Owner Sap.”

After investing in about 12 horses over a period of seven years, Blicksilver says he’s yet to make a dime. Indeed, between the initial investments and the cost of food, training and upkeep, he has lost money.

“I’m amazed that no matter how ill, distraught or unathletic our charges, it has never affected their appetites,” he says.

“We had one horse break from the starting gate, flip backward over a rail and roll down a ravine. Did she die? Of course not. She just did enough minor damage to stop racing, go back to the barn and eat. As long as they continue to eat, we, the owners, must continue to write checks.”

Blicksilver’s experience underscores the risks of investing in racehorses. Many investors maintain that your chances of a big win are better at the $2 window than they are once you become an owner.

Although it doesn’t cost much to start investing in racehorses--some horse-racing partnerships require initial investments as low as $1,000--it can cost more than $3,000 a month to maintain a horse. To recoup that kind of cash, your horse has to finish in the top three or four places in a lot of races. Most don’t.

“It’s rare to buy a horse that wins more money than he eats,” said Gregg Ritchie, a partner at KPMG Peat Marwick, the accounting firm.

Meanwhile, the tax breaks that lured many people into the investments years ago have all but evaporated.

Before the Tax Reform Act of 1986, investors could often reap substantial tax breaks by writing off their losses and depreciating horses on their tax returns. But the 1986 tax act drastically limited losses you could claim from hobbies and “passive” investments.

Now you can only write off the losses to the extent that you have gains from the same type of activity. Otherwise, you have to prove that you are in the business of racing horses, and that may be tough.

Generally speaking, the IRS will assume that racing is more than a hobby if you earn a profit in two years out of seven. If not, you may have to spend upward of three months a year “actively” working at racing in order to claim the deductions, tax experts say.

And, of course, even then the tax breaks only help you recoup part of your losses. They don’t make you whole.

“I’d much rather pay taxes on my winnings than have the IRS reimburse me for a small portion of my losses,” Blicksilver says.

Winnings in this game are tough to come by for a variety of reasons.

For one thing, horse racing is sexy enough to attract investors who are less interested in earning a profit than in participating in the sport. That can skew the normal balance of supply and demand, which makes it likely you’ll pay more for a horse than it’s worth.

Also, no matter how careful you are, you can’t mathematically determine how an investment in a living creature might turn out. There are simply too many unpredictable elements.

Investors should investigate horse bloodlines and look for successful stables. They should also find skilled trainers, veterinarians and jockeys.

If they’re buying horses through limited partnerships, they’ve got to structure the partnership properly.

Limited partners must consider how much control they’ve given to the general or managing partner; whether the fees they’re paying are reasonable; and whether managers are truly looking out for the limited partners’ best interests.

Many suggest that you only go into partnerships where you have a long-standing relationship with a highly skilled, unquestionably honest general partner.

Even doing everything right doesn’t mean your horse will run fast. In the final analysis, that’s the most important factor in determining whether you’ll earn a profit.

As unfair as it might seem, some investors earn a fortune on horses with no-name parents, while others lose their shirts on “sure-thing” thoroughbreds.

Blicksilver says there are psychic rewards to investing in racehorses that may help compensate for the risks.

“Treasury bills are a much better way to make money,” he says. “But you can’t pet a Treasury bill.”

Tom Petruno is on vacation.