Tax Changes For Boaters

Last fall when member Sonja Dumont bought a 28-foot Regal Express cruiser at the Annapolis Boat Show, taxes were the last thing on her mind. "I was so excited to sign the paperwork, all I could do was think about how many days I would be able to spend on the water." Dumont, who is an IT professional, said she'd heard something about tax deductions for boat owners, but that didn't affect her decision on what to buy or when. "I've waited years to get a boat like this that my family and I can overnight on and take some multi-day cruises. I'll worry about taxes later."

Bob Fodera, a certified public accountant and partner with Baker Tilly in Metro Park, New Jersey, whose clients include lots of boaters, says that's not unusual. "If people want a boat, they're going to buy one. Thinking about taxes comes later."

But April is upon us and later is now, so we've combed through the most relevant parts of last year's tax changes to highlight those that matter to boaters. That said, because everyone has different tax circumstances, it's wise to consult a tax professional.

The good news is that the second-home mortgage interest deduction is still available for boaters. Recreational vessels with a sleeping berth, cooking, and toilet facilities whose owners have a secured boat loan will be treated the same as second homes for the purpose of deducting loan interest, though the cap is now $750,000 for new loans originated after 2017, versus last year's $1 million. Fodera says that taxpayers this year may use the home-mortgage interest deduction for one second home in addition to their primary home, but must be able to itemize deductions on their returns. The bad news, however, is that last year's tax changes eliminated the deduction for interest on home-equity loans for purchases made on a home-equity line not related to your principal residence. According to Fodera, boaters can still use equity in their homes to finance their boat purchase, but that interest will no longer be deductible.

BoatUS Government Affairs manager David Kennedy says that there were concerns last year that boat owners might be singled out for negative tax treatment, such as removing the second-home mortgage deduction. "While the perception is that all boat owners are wealthy individuals, the reality is far different," said Kennedy. "In fact, some 70 percent of all boat owners in the U.S. have a household income under $100,000 per year. This tax deduction we're continuously fighting for helps give middle-class boating families some relief and helps grow a strong local marine industry."

Fodera says that while there isn't much bad news for most boaters, a few things have changed. One is a new cap on the deduction for state and local income and property taxes at $10,000 ($5,000 for married taxpayers filing separately). In the past, Fodera says taxpayers could deduct all real estate as well as state and local income taxes, or the sales tax on a boat, whichever was higher. The $10,000 limit may affect boaters in high-tax states, including New York, New Jersey, Connecticut, and California, because they may no longer be able to deduct all of the sales tax they paid on their boat.

There are some positive tax changes for small businesses that are sole proprietorships, LLCs, and S corporations in which boat owners have organized their business where the profits from the business are counted in the owners' personal tax returns. New tax laws could give these owners a hefty 20-percent deduction if their joint taxable income is under $315,000.

Recently, Fodera has had some of these business owners wondering if they should abandon their status as an LLC, S Corp, or sole proprietorship and register as a corporation to pay less tax. While he says those boaters should contact their tax professional for specific advice, it's frequently not a good idea. Also, keep in mind that recreational boat insurers, like BoatUS, typically insure boats owned by LLCs only if they are set up purely for the ownership of the boat and don't insure them in relation to an actual business.