When you're someone with a high net worth, taxes can take a big bite out of your paycheck and your capital gains. And if you're nearing retirement, your tax burden can be even harder to bear, particularly if you don't have enough saved up to maintain your current lifestyle once you stop working. If you're looking for a way to slash your tax bill, consider getting a boat.
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We know what you're thinking. Even though you can afford to buy whatever you want, investing in a boat might not seem like the brightest idea. After all, some skeptics argue that by investing in a yacht, you're essentially throwing money down the drain.
That's because a boat can be expensive to maintain and its value (much like that of a car) depreciates as soon as you buy it. It's possible, however, to get a tax deduction for borrowing money to purchase a boat if you can count it as a second home.
How to Get a Tax Deduction for Your Boat
Mortgage interest deductions are available for owners of primary and secondary qualified homes. The deduction has made boat ownership attractive to both producers and consumers. Some manufacturers even go so far as to design boats based on the rules for mortgage interest deductions.
According to the IRS, any living space can be considered as a qualified home if the property – whether it's a boat, condo, co-op or mobile home – has structures built into it that make it possible to sleep there, cook a meal and use the restroom.
You wouldn't have to live in your boat all the time (especially if you're using it as a second home) in order for it to be viewed as a qualified home. Generally, your interest on a home that isn't your first or second home might be deductible if the loan you have is being used as an investment or a way to finance business expenses.
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What If I Want to Rent out My Yacht?
If you're planning to rent out your boat to your neighbors or someone else during the tax year, you won't get a deduction on your boat loan unless you live there yourself for over two weeks or for more than 10% of the time that it's being rented out, depending on which one is longer. You also can't allow more than two tenants to rent your boat at the same time to qualify. Two people who share sleeping quarters count as one tenant in the eyes of the IRS, so you can still rent to a couple.
Factors to Keep in Mind
Homeowners usually can deduct the majority (if not all) of their mortgage interest. The limit is set at $1 million for the interest on first and second homes (including boats) for single taxpayers and $500,000 for married couples filing separately. The amount of interest you can deduct depends on three factors: the mortgage amount, the date that you first took out the loan and the way that you use the loan.
It's important to remember that the mortgage interest tax deduction only applies to residential living spaces. So if you use part of your yacht for office space, you'll have to divide up your costs into two sections – one that's based on the fact that you lived in a qualified home and one showing that you used the space for other, non-deductible purposes.
What's more, the interest deduction merely covers secured debt, or debt that's backed by collateral that can be seized if you default on your loan. A loan can be described as secured debt, for example, if a lender can take your boat for not keeping up with your monthly loan payments.
In addition to the $1 million interest deduction that you can obtain from buying or fixing up a boat, you might also be able to get a deduction of up to $100,000 for any home equity debt you have.
Related Article: All About the Mortgage Interest Deduction
Buying a new yacht might be worth it if you're preparing for retirement and you're looking for an extra tax write-off. By knowing the rules surrounding mortgage interest deductions for second homes, you'll be able to make sure that your boat has all of the features and amenities you'll need to qualify for the deduction.
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