Boat loan interest: Tax deductible?

[John24107]

FAQ's aren't the law

Unfortunately, Peter, your source doesn't have the force of law or regulation. It's a response to a "frequently asked question" written by somebody that could well have been wrong. (I read somewhere that last year 3 in 10 answers provided by the IRS "Answer Line" were incorrect. That's answers given by IRS employess interpreting the rules. Scary.) If you go directly to the publication (that has the authority of a regulation) that covers the question (IRS Pub 936), it only mentions a use requirement for those that rent out the second home. For those of us not renting out our boats ever, it is very specific about the use requirement. I quote again:"Second home not rented out. If you have a second home that you do not hold out for rent or resale to others at any time during the year, you can treat it as a qualified home. You do not have to use the home during the year." Note the last sentence in the above paragraph.My disclaimer: I'm not a CPA or a lawyer but I can read pretty darn good! []

 

[Peter18012]

John, you are right, but

what I meant to convey, is if you DO rent your boat you fall into the "must use it more than 14 days or 10%" rule. If you don't rent it out at all, then no use requirement.The thing that is interesting on this 14 day rental rule, is that if you do rent it out for up to 14 days, you don't have to report the rental income, plus (in most cases) you get to fully deduct the interest as "2nd home" interest.I know some who rent their boat minimally as "boat & breakfast" for occasional overnites, and it is free money - no tax, as long as < 15 days.When there is an apparent conflict in published guidance as promulgated by IRS, in whatever form (documents or online), it is usually due to subtle differences in the facts to which the law is being applied, rather than a true conflict. As you say, not true, however, if you get non-written advice from IRS (via "help" line, in person at IRS office, or wherever). There, it is whether you get a good or not-do-good IRS staff person to help you. (And IRS, as all organizations, has both.) No guarantees.Like most anything else in life, you're best advised to GET IT IN WRITING!(and the Circular 230 disclosure in my last post still holds!)

 

[Benny]

Yes the boat has to be mortgaged to qualify.

If the boat fits the qualifications then you could deduct the interest paid for that year on a purchase money mortgage. If you already own the boat free and clear and you get a mortgage loan on it then use of the proceeds becomes the determinant factor. If the borrowed money went to improve or refit the boat then the interest exemption could be claimed; but if you used the money for a trip or a car it would not qualify. The issue becomes muddied when partial use of loan proceeds went to boat improvements and part went for consumer purpose. If such is the case talk to a tax advisor about the allowable deduction in such case.

 

[Fred Ficarra]

And with that last post ladies and gentlemen

I ask; I our tax system nauseating or WHAT!?

 

[Rick Webb]

Sad Part of This is

Broke Sailor will now deduct the interest on the boat and find it does not bring his taxes down one nickle.

 

[Scott R21226]

Finally the Answer from the IRS CODE

This subject got me interested . I never heard the 20/30 day requirement for a second home (there are special requirments for use if the residence is rented under IRC 280A but that is not the issue at hand). The issue as I understand it is does a boat qualifiy as a second home. The IRC section that deals specifically with this issue is IRC 163. The specfic section is IRC 163(h)(3)(A) "In general. The term "qualified residence interest" which means any interst which is paid or accrued during the taxable year on (i) acquisition indebtedness with repect to any qualified residence of the taxpayer, or (ii) home equity indebtedness with respect to any qualified residence of the taxpayer" So what, you may ask, what is a quailified residence and the answer would be found at IRC 163(h)(4)(A) to paraphrase - a principle residnece and 1 other residence. But there is a catch - the second residence must be considered personal as defined by IRC 280A which says that a residence will be considered personal (and therefore some interest can be itemized) if it is used for personal use the greater of 14 days or 10% of all rental days. At this point you may say you have the answer - 14 days - but you would be wrong because you did not finsh reading IRC 163. IRC 163(h)(4)(iii) says "Residence not rented. For purposes of clause IRC 163(h)(4)(A)(i)(II) (which is the clause that says the second house must be used for "personal use"), notwithstanding section 280A(d)(1), if the taxpayer does not rent a dwelling unit at any time during a taxable year, such unit may be treated as a residence for such taxable year". Thus there is no requirement to spend x amount of days on a boat that qualifies as a second home if the boat is not rented.Now back to if the boat qualifies for a second home - the Fed Tax Regs Sec 1.163-10T(p)(3)(ii) states "Whether property is a residence shall be determined based on all the facts and circumstances, including the good faith of the taxpayer. A residence generally includes a house, a condo, mobile home, boat or house trailer, that contains sleeping space and toilet and cooking facilities..."So the answer according to the IRS Code and Regs themselvse is - if you don't rent the boat, the boat secures the loan, the boat loan (plus loan and HELOC on primary residence) is less then $1,100,000, and the boat has a toliet/cooking/sleeping space then you can deduct the interest -- Regardless of how many days you stay on it.Where can I bill this past 30 minutes to?Scott RThis in not tax advice and you should consult your tax advisor...

 

[Fred Ficarra]

Anybody got the latest numbers?

You know,,,,,,the number of DOLLARS that our bloated taxation invention (Income tax) costs JUST TO jump through its' hoops? Last I heard it was costing the tax payer on average, more to keep track of their obligations and to file, than it cost in actual funds remitted to the Treasury. That can't be,,can it?!How thick is the paper-stack that contains the U.S. tax code? Must be around a foot, give or take six inches. All would go away with a flat rate tax. But so would all those 'jobs' that haul in cash so we can send our money to the Feds. And just think of all the jobs that would be lost at the IRS,,,ALONE. And Congress would have much less to do every year! Nope, ain't gonna happen.

 

[Don S/V ILLusion]

makes me wonder

re-reading the original post, apparently a "tax advisor" misinformed him regarding one of the more simplistic tax issues there is. When one considers all the accountants and tax attorneys making a thriving buisiness of it, this makes me wonder if we don't waste more money trying to file taxes than we spend on taxes themselves. Just look at all the misinformation provided on this one thread provided by intelligent well-intended peopleAbout the best advice I ever heard from anyone is - if you are accruing interest expenses on a loan for a depreciating asset, regardless of the tax implications, you are nuts.

 

[Ross]

Fred, The flat tax seems like such a good

idea until you start looking at the details of how people make a living. People that work for wages could benefit from a flat tax if they weren't in the lowest income levels. But self employed people would have to define what is income for the business and what is personal income. Then there is the question of what constitutes a business expense. The British use a value added tax. That approach is simple subtract the material cost from the selling price and pay tax on the difference. For genuine peace of mind concerning taxes, decide upon the few government maintained systems that serve you best and allow that your taxes are used for those things and the government wastes other peoples money but not yours. For example, I don't fly in airplanes so the taxes that are spent to maintain and improve Baltimore-Washington International Airport are of no benefit to me but my sister in law flies from Baton Rouge to Baltimore for Christmas each year and her taxes are what keeps those two airports working. Mine are used to maintain the roads and bridges that I travel over for work and to get to my boat. Your tax dollars are spent on 400 dollar toilet seats for the Pentagon.

 

[Jim Seamans]

Here is an interesting idea

nm

 

[Scott]

Fred, you may be right ...

Actually, you are right that living without debt is a great way to go. It doesn't make a lot of sense to pay 6% interest just so you can earn a deduction on the amount you pay. Living without debt probably makes more sense as you get older. I know you are one of those crusty old codgers that can't stand owing anything to anyone. But you are neglecting to think about all of those things that make a mortgage worthwhile. For many homeowners, especially the younger ones, it is the only opportunity for people to actually enjoy the opportunity to leverage their equity. It works like this:If you put 20% down on your $200,000 house and 5 years after you bought it, you can sell it for $250,000; you have earned $50,000 on an investment of only $40,000. That's a great return by any standard and millions of homeowners have been able to take advantage of this opportunity. But let's say that instead of getting a mortgage, you paid cash. Your return of $50,000 was gained on an investment of $200,000, which isn't quite as good is it? What's even sadder, is that if you had the $200,000 to begin with, you could have bought the house for $40,000 and invested the other $160,000 in other money making investments.Conversely, let's say you don't have the $200,000 and you have to wait 5 years to put it in your savings account. In five years, you haven't quite caught up to the market because the house you could have had 5 years ago (for just $40,000) has now increased in value to $250,000. Obviously, you can eventually catch up with enough savings to buy the house you want, but at the loss of how much opportunity?Often times, young people need to build equity in homeownership before their child raising years, so that they can afford the home in the neighborhood that has the best schools when their children are ready for school. If they wait, they lose the opportunity by not building their equity by owning a starter home.The tax code which allows deduction of interest for homeowners is a fantastic incentive for more people to enjoy homeownership. It has enabled many people (including minorities) from poor backgrounds to get the break they need to participate in the growth of equity. It is easy to tear apart the system now while home prices are declining and people have taken on too much debt. It is obvious that the balance between risk and reward has to be managed correctly so that people do not over-expose themselves (and there are too many people that are in credit danger). It's not a reason to trash the benefits of the system. Even ARM's have a valid purpose. I have a 5-year ARM. I have enjoyed very low interest, and if the adjustment makes me unhappy, I can re-finance (rates are still very low and going lower) or I can simply pay off the loan (I'm old enough now to enjoy that option). Not everybody that has an ARM is going to go belly-up when the adjustment comes due. Some people will just suck it up and cut back in other ways so they can continue to enjoy their home. Of course there are numerous people who made bad investments on second homes, boats, or investment properties who will choose to simply walk away from their mortgage. I have no sympathy for them or their lenders. But even the sub-prime mortgage market, despite the bad press it has now, enabled many people to stretch beyond the conventional limits to enjoy homeownership. We don't ever hear the stories of people who were grateful for the opportunity to own a home when they may not have been conventionally qualified; but given the opportunity, with hard work and modest living habits, have been able to keep the home they may not have ever been able to own if the doors were slammed shut on them. We like to condemn banks for being heartless, too. I guess we just think we are entitled to all sides of an argument when we express our outrage.BTW, when I want a loan for a bigger boat, I may just get a home equity loan instead of a boat loan and that way I can still take the tax deduction.

 

[Peggie Hall HeadMistress]

Scott, that's all well and good when it comes to

a house...which is an APPRECIATING asset, and therefore an investment. But vehicles and boats are DEPRECIATING assets. What's more, for at least the first 5 years of a 15 year loan more than 95% of your monthly payments are interest...so you build no equity to offset the depreciation. And while you can get some benefit from deducting that interest, at least $.65 of $1.00 paid to the lender as interest still comes out of your pocket, not the gov't's...even more of it if you're in a lower tax bracket.So a mortgaged home is a sound investment...but a mortgaged boat is not. Neither is one purchased for cash...but we have to have SOME fun in our lives!

 

[higgs]

Peggy is right.... for the most part

A conservative investment, over 5 or 10 years, should be able to get you 8 to 10 %. If you can borrow money for under that amount, do it. If you have 50k and can earn 10 % with it in investments - why not do just that and borrow the 50k for your boat providing you can get the loan for lesser rate? The tax break is only gravy.

 

[Scott R21226]

Great Site

This is truely a great site - where else can I discuss my favorite subjects - sailboats, taxes, and investments on one thread. As a numbers person I have tried to justify owning boats. I can't. I expect to lose money - perod. But I do it to get away from the stress and strain of life. So what is that worth? A lot to me. If Uncle Sam want's to give me a tax benefit I will take it but that is not why I bought the boat.Again this not tax advise Scott R

 

[John24107]

Yeah, No, Maybe

Scott R. That's what I said.It does make sense to have a mortgage on a depreciating asset if that's the only way you can afford the dang thing. Sailing is a pastime that should not just be for the wealthy/elite. I earn a comfortable living but, $20k cash (roughly the cost of my little boat) is not something I have laying around for the purchase of a toy. It represents a substantial portion of my income. Therefore, I either purchase the boat at an an admittedly premium price (Principle & Interest) or purchase a lesser vessel, or not purchase one at all. I would have preferred to pay cash but that's not reasonable. I could save for a while (assuming I'd save at the rate of my monthly payment) I'd have to wait years. I'm 54 and, the last I checked, I ain't getting younger. Scott (in N.J.)makes an eloquent case for mortgaged purchases.I'm grateful that the tax code allows me to divert some of my money away from the government and toward the bank.

 

[higgs]

John....

In your situation, you are correct. The enjoyment you get out of that boat is worth something. Enjoying life is not always cost effective.

 

[higgs]

Or should I say.........

Enjoying life is worth the cost.

 

[Dragonfly6689]

Don't forget opportunity costs

Fred, Scott, Peggie -- Great comments!!When we bought Dragonfly in 2003, we got a 4.5% fixed interest rate and financed 90% on a 15 year loan. We refinanced our home at 4.25% fixed on a 15 year loan that same year. We could have liquidated investments for a larger down payment and could have paid more each year to have reduced our debt. But we looked at the opportunity costs of doing that.We decided to invest instead of reducing debt. We are in the 31% marginal tax bracket -- 25% fed, 6% state. Thus the tax break on the interest means the money is only costing us about 3%.We are investing $10,000 per year in Roth IRAs (it will increase to $12,000 in 2008). Money grows tax free. We have averaged about 15% return since 2003.If we had used the $10,000 per year to reduce debt, we would have lost the opportunity to make 15% --- 12% difference in opportunity costs.We have other investments that are not tax free that have averaged close to 10% return AFTER TAXES. We made about 7% more by investing vs reducing debt.Don't forget that you have to itemize to take advantage of morgage interest. I've just completed preliminary tax analysis for 2007. Standard deduction is about $10,000. Our itemized deductions are estimated at about $17,000.Even if we did not itemize, there is an 11.5% advantage of investing in Roth IRA over reducing debt and 6.5% on taxable investments. Your calculations will vary based on morgage rates and investment returns.For what it's worth....Mark

 

[Fred Ficarra]

Well, we're all different. Let me see if

I can come up with some points that apply to us all,,,,,Hmmm.OK. A home IS NOT an asset. It's a liability. How's that? Except for inflation, anybody out there making cash on their home?The scary thing about most of our lives is that the only asset we have is our jobs. Income producing real property is rare. Lose our jobs and we loss it all.Let's see. Oh, we were talking about our wonderful tax system vs a flat rate. I submit that a true flat rate tax has no need to define it's rates. Set them and forget them. That means FORGETTING deductions! Deductions are nothing more that catering to special interests. Who's got the power in the country? Why the people with money of course. And who's business is still supplemented by Congress with income tax deductions? Yep, bankers. Stop it ALL and you stop the feeding-frenzy-inflation of liabilities like our homes.Hey, these are just random thoughts from a retired working stiff. Onward;Let's see,,, OK, here's a thought. If a mortgage is so good, great. But think about your lives right now without a mortgage. Same home, same income. Everything the same including property taxes. Where would you stand? Better yet HOW would you stand? You would stand FREE! Nothing would be slithering behind your back to take away your abode. Nothing but the tax man.For me, the way to realize what our 'system' of financing our lives does to us was to put our finances on the COMPUTER. Yep. 'What-ifs' are easy to do when you're honest about your income and liabilities. Then it becomes clear what happens to your lifestyle when you GET OUT OF DEBT. (OK Phil, I'm keeping this about sailboats. Here I go.) While rebuilding our boat (see what I mean about a liability?) I budgeted as much cash as possible to the project. I used my credit card but played the 'float'. Sixty+ thousand dollars and three years later, the project was done. Eight dollars spent on interest. (that diesel heater cost too much to pay off the card in full one month) OK, back to the computer. What happens to our mortgage when we dump the cash going to the boat into the debt on our home? Wow! And if we throw in even more cash? Lordy! Hey honey, come here and look at this! How about kicking in some more cash each month? We'll pay off the house in two years! Then look how much cash we gain! (the computer spreadsheet shows accumulated interest after the payoff) We are millionaires in no time, just with cash! We did it! And it was easy. Now when we want something like a new car or truck or flat screen TV, we just buy it. For cash. We just bought our second HD TV big-screen for the bedroom. (just for fun ) We could buy FOUR per MONTH just with the mortgage money we don't spend. WE'RE FREE!!!!! And I stuck $2500 in savings Yesterday. No need to spend it. We have all the security (home) and material things that we could ever want. And no mortgage.

 

[Stu Jackson]

All the concepts of avoid paying

anything on interest, which is the expense of borrowing money, is a reasonable goal.The one thing the "conceptualize-ers" haven't figured in, so far as I can see, is basic CASH FLOW. Yup, it's easy to say save, save, save.But the real world comps are this: given the existing tax laws and the mortgage deductions, if compared to renting at around the same monthly amount, home "owning" (i.e. borrowing) is a better deal.NOW, the real question to the flat taxers is this: how do you propose a conversion from the existing tax structure to a flat rate?