Your boat may qualify for the same IRS tax advantages that are available for your home. And by financing your purchase, instead of liquidating assets or paying cash, you increase your financial flexibility. This enables you to take advantage of attractive new investment opportunities as they come along... and the earnings from these investments can easily exceed the cost of your marine financing. In the end your boat may cost less by not paying cash.
Tax deductibility of yacht loan interest.
Qualification of yacht as a residence:
Under IRC section 163(h)(2) a taxpayer may deduct any qualified interest on a qualified residence, which is defined as a principal residence and one other residence owned by the taxpayer for 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 indebtness 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 residence 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 a boat is chartered out the taxpayer will have to use the boat for personal use for either more than 14 days or 10% of the number of days during the year that the boat was rented, in accordance with section 280A(d)(1).
Tax form 1098 is not necessary for deductible interest expense. In accordance with IRS instruction 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.
Borrowing against your home:
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 improvement. If the money is not used for the home then the interest expense does not qualify for the deduction.
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.
Stock margin loan:
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 something your broker probably would not be prepared to provide.
Example saving for financing your boat:
For instance a 20-year loan at a fixed rate of 8.5% for $100,000 would require a monthly interest and principal payment of $867.82.
The interest cost of this loan over an anticipated 60 months would be $40,196.30.
If you are in the 30% tax bracket, this interest expense deduction would save you $12,058.91, effectively reducing the cost of the loan to $28,137..39.
This same $100,000, if invested earning 9%, would grow to $137,703.68 (after tax) in the same time period. Tax free municipal bonds yielding 6% could earn $34,885.02 over 60 months. More aggressive investments could obviously make earnings even more attractive.
The preceding information was compiled with the help of the National Marine Bankers Association and Deloitte & Touche, LLP. Rates are subject to change without notice. Actual rate may vary based on credit history, collateral, state of residence, down payment, loan amount and other criteria.