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THE TRUTH CONCERNING TAX DEDUCTIBILITY OF INTEREST ON YACHT LOANS |
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Does a boat qualify as a residence for purpose of deducting interest expenses on a residence under Internal Revenue Code 163?
Answer - YES!
Under IRC section 163 (h) (2) a tax payer may deduct any qualified interest on a qualified residence, which is defined as a principle residence and one other residence owned by the taxpayer for the purpose of deductibility for the tax year. IRC section 163 (h)(3) defines qualified residence interest as any interest which is paid or accrued during the tax year on acquisition or home equity indebtedness with respect to any qualified residence of the taxpayer. In accordance with IRC section 163 (h) (4), a boat will be considered a qualified residence if it is one of the two residences chosen by the taxpayer for purposes of deductibility in the tax year as long as it provides basic living accommodations such as sleeping space (berth), a toilet (head), and cooking facilities (galley). If the boat is chartered out, the taxpayer will have to use the boat for personal purposes for either more than 14 days or 10% of the number of days during the year the boat was actually rented, in accordance with the IRC section 280A (d) (1).
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If the interest expense is deductible, is it necessary for the boat owner to receive a Form 1098 from the lender to be able to claim the deduction?
Answer - NO!
Form 1098 is not necessary in order to receive 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.
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Why should I not borrow against my home, which I own free and clear?
Home mortgage interest deduction is limited to interest paid on mortgage debt used to purchase or improve a residence, or to refinance the remaining balance on a purchase or improvement. If the money isn’t used for the home, the interest expense does not qualify for the deduction.
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How about a home equity loan?
Home mortgage interest deduction is limited to interest paid on home equity loans up to $100,000. By using a home equity loan, you may limit the amount of interest that is deductible, if your boat loan exceeds $100,000.
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I can borrow against my stock on a margin loan, at an attractive rate. Because the money is used to buy the boat, is the interest still deductible?
Second home mortgage interest deduction is limited to interest paid on second homes that are secured by that second home. You would need to have a written collateral agreement (security agreement) indicating the boat as collateral, which is probably not something your broker would be prepared to provide.
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The preceding information was prepared by Gary Boudreau, Deloitte & Touche, LLP, Newport Beach, California.
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| *Rates are subject to change without notice. Actual rate may vary based on credit history, collateral, down payment, loan amount and other criteria. |
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Fixed rates
as low as * |
5.87% |
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If You Are Paying Cash For Your Boat You Are Probably Paying Too Much! |
| Boat buyers have many choices when it comes to paying for their purchase, but do they always make the right one? |
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