Can You Claim Interest Paid on Boat Loans on Taxes?
One of the main tax benefits that home owners receive is the deduction of the interest payments they make on their mortgage. However, the IRS extends this deduction to taxpayers who own certain types of boats and make interest payments on a loan to purchase it. Before claiming the deduction, however, you must insure that the boat has certain functionality to qualify for the interest write off.
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Qualified House Boats
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The IRS will allow you to claim a deduction for the interest you pay on a boat loan provided that it is a "qualified home." To satisfy the qualified home requirement, the mortgage lender must have a security interest in the boat and you must use the boat as either your main home or a personal second home. Additionally, the boat must feature cooking facilities, a bathroom and an area for sleeping. If it doesn't have all three, then you cannot consider the boat as a home.
Lender Security Interest
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What makes a mortgage different from other types of loans is that the bank or other financial institution that lends you the funds to purchase the boat automatically takes an interest in the property if you default on repayment. For example, if you obtain a mortgage to purchase a house boat and cease making the monthly payment, the mortgage company can foreclose or repossess the boat and eventually sell it to pay off your loan. Only these types of loans will allow you to deduct the interest payments you make. In contrast, when you use a credit card to purchase the boat, the interest payments you make are nondeductible because the credit card company has no ownership rights in the boat, even if you stop paying the credit card.
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Annual Interest Limitations
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The IRS also caps the amount of interest you can deduct each year by limiting the number of mortgages you can deduct the interest on to two qualified homes. The first home is always your main home, which is the place where you live for most of the year. You can choose any other second home, including your boat, to deduct the interest on. However, the IRS also imposes a dollar limitation. You can only deduct the interest that accrues on up to $1 million of mortgage balances. For example, if your main home has an $800,000 mortgage outstanding and the boat has $300,000; then the interest that accrues on $100,000 of the boat loan is not deductible.
Itemizing Boat Interest
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The final hurdle you need to overcome to deduct the interest on your boat loan is being eligible to itemize your deductions. The IRS only allows you to deduct mortgage interest as an itemized deduction on the Schedule A Form. However, itemizing is only beneficial to you when the total of your deductible expenses, including the boat loan interest, exceeds the standard deduction you are eligible for. If it doesn't exceed the standard deduction, then you will not be able to deduct any of the interest on your boat loan.
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