Boaters Can Now Only Deduct Interest for Loans Up to $750,000

The historic tax bill enacted yesterday preserves the second-home mortgage interest deduction, which also applies to certain boats. Under current law, homeowners can deduct interest paid on mortgages up to $1 million on a first and second home. Under the new tax law that cap will be lowered to $750,000. 

Even a modest new trawler could entail monthly loan payments of more than $4,000, so the interest amount is significant.

Many power cruising vessels in the 30-50 foot range are sold new for $300,000 to $750,000. Bigger boats naturally cost more, but since wealthier people tend to be the one's that purchase bigger boats, they often already use the second-home deduction for...well...a second home. You can only have one second-home deduction.

Here's how the deduction is described by Discover Boating:

It is probably the secret dream of all boat owners - finding a way to deduct the cost of their boats every April when the IRS comes calling for the annual donation. Surprisingly enough, there are several ways that you can write off some of the cost of your boat and reduce your tax burden. Even better, they’re legal and won’t require you to change your mailing address to Leavenworth, Kansas.

According to Tanner Kidd, a tax specialist and boating enthusiast from Seattle, "Most boat owners miss out on some valuable deductions because they don’t know about these particular loopholes. But anyone who doesn’t take full advantage of the tax laws is simply giving money away."

Probably the most commonly misunderstood tax deduction is the write-off of interest paid for a second home which, in this case, is any boat that can be lived aboard. Your tax advisors wouldn’t think twice about deducting the mortgage interest if you owned a mountain cabin or a beach cottage, but they often don’t realize that a boat also qualifies.

Now, before you get your hopes too high, the boat must "reasonably" be livable - your 15-foot jet boat doesn’t qualify. The IRS has generally determined, however, that any boat that has at least one berth, a permanent galley, and a head (even if it’s just a Porta-Potti) qualifies for the second home deduction.

There are some caveats here that you need to remember. Obviously, you can’t already have a second home you are deducting. If you do, you can choose between the second home and the boat each year for your deduction. You need to ask the lender with your boat loan for IRS form 1098 to report the interest or, in most cases, you can simply get a letter from the lender. If you used an equity line of credit with your home or the boat as security, you’re entitled to deduct those interest charges.

Don’t forget that you can deduct not just the interest, but also any points paid to get the loan as well as the penalty for an early payoff of the loan. 

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