Tax Law Allows Some Boats To Be Second Homes

If you are making payments on a boat used for pleasure, in some cases you are allowed to write off the interest as a tax deduction. You can if the boat meets the tax code's definition of a "second home."

As most taxpayers are aware, you can write off mortgage interest on your primary residence, with some limits. You are even allowed to deduct the mortgage interest on a second home.

But as far as the Internal Revenue Service (IRS) is concerned, that second home does not have to be built on a foundation. It can float on the water.

"A home includes a house, condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities," the IRS said on its website.

Naturally, boat dealers and manufacturers work hard to spread word about this particular tax break.

The National Marine Manufacturers Association (NMMA) says form 1098, issued by lenders, is not necessary in order to claim the qualified interest deduction. In accordance with IRS instructions for Schedule A, form 1040, if the taxpayer does not receive form 1098, deductible mortgage interest should be reported in line 11 instead of line 10 on Schedule A.

Just like the mortgage interest on any home purchase, there are limits. Interest paid on a home equity loan to buy a boat also may not be deductible.

"Home mortgage interest deduction is limited to interest paid on home equity loans up to $100,000," NMMA says. "By using a home equity loan, you may limit the amount of interest that is deductible, if a boat loan balance exceeds $100,000."

Also, borrowing against a stock portfolio to purchase a boat creates complications in regard to interest deductibility. Second home mortgage interest deduction is limited to interest paid on second homes that are secured by that second home.

A written collateral agreement from a broker indicating the boat as collateral is something brokers are not inclined to provide, according to NMMA.

If you have a boat that you thinks falls into the category of a second home, or are considering a purchase, it's a good idea to discuss the issue with your tax advisor first.