Tax Law for a Boat as a Second Home
What Boats Qualify?
- Any dwelling you own, including a boat, that has a sleeping area, a cooking area and toilet facilities qualifies as a second home. These areas can all be separate rooms and complete setups, or they can exist in one room, as long as it is possible to cook, go to the bathroom and sleep.
What is Deductible?
- The second home designation only matters if you have an outstanding loan on the boat. Just like with your regular home, the interest you pay on a mortgage is what you can claim on your taxes. You must declare which residence is your primary home and which is your secondary home. However, it is not necessary to claim the same designations each year. You can switch them around for your benefit. There are some limits on the amounts allowed. You can only claim a loan in the amount of fair market value and up to $500,000 (or $1 million for married couples filing a joint return).
- Boats are expensive vehicles. A common saying in the boat world is that the word "BOAT" is really an acronym for "Break Out Another Thousand." However, regular expenses for upkeep or repair are not tax deductible. You cannot declare repairs or upkeep expenses on a boat any more than you can claim a new furnace or repairs on your primary home. What you can declare is interest on a second mortgage, money spent for value-based improvements and the cost of any mortgage point fees.
Number of Second Homes
- You can only have a single second home for tax purposes, according to MadMariner.com. Even if you actually own an RV, a mobile home and/or more than one house, you must decide which one you will use for a second home on your taxes. A wise choice is the one you have the greatest mortgage liability for.
- If you use your boat for a commercial purpose, even one time, you must spend at least 15 days on board as a live aboard. Keep accurate records for the time you spend living on your boat to prove occupancy when necessary. If you charter your boat for 15 days or more, you must report the income, and, to remain eligible for a second home deduction, you or another family member must live aboard for 10 percent of the time you rent it out.
- Sale proceeds from a second home are tricky. You can declare losses, but profits are usually capital gain. However, if you live full-time in your second home for at least two out of five years, you can exclude up to $250,000 of the sale from taxable income ($500,000 for married couples with both living in the home for the time in question and filing jointly).
- Be careful when you choose to claim a boat as a second home. A boat is a "flag" item for the IRS, and you may have to prove your ship's eligibility. Even though a cooking area does not have to be separate from a sleeping area, it does need to be a dedicated cooking area, not simply a grill on deck. Also, the bed has to be a permanent bed, not an inflatable mattress on the aft deck.