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Boat, sweet tax-deductible, second home, but perhaps for not much longer

Austin, Texas, where I currently call home, is surrounded by a decent amount of water. And although the current drought has dropped the area lake levels a bit, the waterways were full of boats this Memorial Day weekend.

Neighborhood View of Lake Austin_SKB photo
The slice of Lake Austin (really just a portion of the Colorado River
between two dams) that I see when I walk in my neighborhood.

I always get a bit jealous when I see folks tooling about on their boats. But then I remember that old line about a boat being a hole in the water where you throw your money and my envy eases somewhat.

That financial warning was reinforced today when I typed "boat second home" into the IRS website's search engine and a page topped with links to disaster losses popped up on my PC screen.

OK, maybe the IRS search was just being quirky because some people are able to make a watercraft work as a more positive tax break.

They are the folks whose boat qualifies as a second home, meaning that the boat owner is entitled to the same tax breaks as a second residence on terra firma.

Second home qualifications: As you would expect, the requirements to treat a boat as a second home are essentially the same as for a primary residence.

You need a kitchen (or galley, in boat-speak), a place to sleep and bathroom facilities (aka a head).

Don't get cute with these requirements.

A hibachi on your deck won't pass IRS muster as a galley.

A sleeping bag or folding cot on the open deck isn't going to cut it as an IRS-acceptable bedroom.

And I'm not even going to consider how you might get around a built-in bathroom.

The point is, don't try to pass your boat off as a second home if it doesn't meet the IRS guidelines. It's way too easy for the tax man to check.

Second home deductions: But if you have a boat with the required features and took out a secured loan on the vessel (that is, the boat is collateral), you may be able to claim the loan interest as a tax deduction.

Remember, too, that other IRS rules on second homes apply to your boat.

For tax deduction purposes, you can only have one second home.

If you have lakefront cottage and a boat, then the house is probably your best bet as a second home tax claim.

Or you have an RV and use it to haul your boat to the lake for nice break each summer, the expensive multi-wheeled vehicle is likely your second home.

Don't get greedy and try to squeeze a tax break out of your boat, too.

Also, if you charter or rent out your boat when you're unable to get to the lake, you're going to have to show that you truly consider the craft as your second home and not as a business enterprise.

That means for the occasionally rented boat to count as a second, or vacation home, you must use it as a home during the year for 15 days or stay aboard overnight for 10 percent of the number of days the boat was rented, whichever is greater.

You saw "overnight" right? That means you bunk on the boat from sunset until sunrise, not just take it out for spin on 15 or more days.

And to bolster your case if the IRS ever asks, document your boat stay-overs.

Sinking the boat second-home tax break: All-in-all, though, claiming a boat as a second home is pretty easy.

In fact, some members of Congress think it's too easy.

Rep. Mike Quigley (D-Ill.) has introduced H.R. 1702, the Ending Taxpayer Subsidies for Yachts Act. Joining Quigley as original sponsors of the bill are Reps. Tim Walz (D-Minn.) and Gary Peters (D-Mich.)

The bill would still let a boat owner claim the mortgage interest deduction for the vessel, but only if the  boater uses the craft as a principal residence.

"As we work to address our budget challenges, closing this frivolous tax loophole is a no-brainer," said Quigley in announcing the bill.

The tax bottom line is that second-home boats would no longer afford the owners a possible added tax deduction.

Naturally, the National Marine Manufacturers Association slammed the bill, saying it would jeopardize thousands of boating industry jobs and is based on a misperception that taxpayers the current tax break subsidizes the lifestyles of wealthy yacht owners.

I feel for folks who  might lose their jobs if boat builders have to cut back. But as I've said before, the second-home tax breaks need to be on the top of the tax code revision list. That includes all types of second homes.

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