If you navigate several Internal Revenue Code Sections successfully, you can deduct interest on a boat loan as second-home mortgage interest. The laws say a taxpayer may deduct qualified interest on qualified residences, which are defined as a principal residence and one other home, including, in some circumstances, a boat.
IRS Publication 936, available at IRS.gov, contains a worksheet that will help you sail through these calculations.
Not every boat or boat owner will qualify for the mortgage interest deduction. It is available only to taxpayers who itemize deductions. Standard deductors need not apply. Second, the vessel must qualify as a second home and have basic living accommodations such as a place to sleep (a berth), a toilet (known onboard as the head) and cooking facilities (the galley).
The mortgage-interest-deduction rules that apply to landlocked homes also apply to floating ones. You are limited to the interest paid on up to $1 million in debt used to acquire, construct or substantially improve your primary residence and one other home, plus the interest on a home-equity line of credit up to $100,000. The boat must be the collateral for the loans.
Points (one point equals 1 percent of the loan amount and is ordinarily viewed as prepaid interest) on second homes are not deductible in the year paid but can be capitalized and deducted over the life of the loan. Points are not charged for most boat loans these days.
Also, you must make personal use of the boat for more than 14 days per year or at least 10 percent of the time you charter it out to others. Charter boats or vessels used for investment have their own tax rules.
Once it is determined that a boat acquisition loan qualifies for the mortgage interest deduction, the question often arises of whether the interest on money borrowed to make improvements also qualifies. The IRS has said that if such money is used to make permanent improvements that add value, extend the craft's useful life or adapt it to new uses, the interest will qualify for the tax deduction. The IRS will disallow the mortgage interest deduction for borrowed money used to perform routine maintenance or to make repairs.
Before you run to the local marina to buy that yacht, you should take a few other factors into consideration. Most banks will require a marine survey before making the loan. According to the National Marine Bankers Association, a marine survey is analogous to the home appraisal required by mortgage lenders. The marine survey will report on the hull, fittings, equipment, electronics, safety equipment, electrical systems, fire-suppression systems and fuel systems. You may want to also obtain a separate engine survey.
Unlike land-based homes, boats generally do not appreciate in value. Their value will almost universally decrease over time. Down payments in the 20 percent to 25 percent range are required for the best interest rates, and marine lenders will typically not lend money for more than 15 to 20 years. Because there are no real property taxes for a boat, there are no federal deductions for real property taxes paid locally. Other non-deductible expenses include the cost of insurance, title and registration, and the recurring cost of renting a boat slip.
Although there are some attractive tax attributes for a second home that floats, the decision to buy a second home on land vs. water really should be based on your use and enjoyment of each. As the saying goes: There is really only one thing better than buying your own boat, and that is your best friend buying his own boat.
Harvey S. Jacobs is a real estate lawyer in the Rockville office of Joseph, Greenwald & Laake. He is an active real estate investor, developer, landlord, settlement lawyer and lender. This column is not legal advice and should not be acted upon without obtaining your own legal counsel.