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Can a houseboat be claimed as a second home? This is an important consideration if you're looking to save money on taxes.
Yes, a houseboat can be claimed as a second home, but there are certain limitations. In fact, a second-home deduction for the interest paid for houseboat loans is considered one of the biggest tax deductions houseboat owners can take advantage of.
However, as is the case every tax season, one needs to do their due diligence and get the facts (and figures) right. This is why it is important to find out all there is to know when claiming your houseboat as a second home. Needless to say, you’ll only get to take advantage of these tax cuts if you get it right.
Luckily for you, as houseboat owners, we are in the best position to guide all other fellow houseboat enthusiasts who want to get second-home deductions and possibly save thousands of dollars in the process.
What Is a Second Home?
To understand whether or not a houseboat can be claimed as a second home, you will first have to understand what is considered a second home in the government's eyes. In the US, a primary residence is a home an individual resides in for most of the time. According to the IRS, this means that the property needs to be owned as well as lived in for the duration of two years over the past five years.
A secondary home is not the home you live in most of the year but also a residence that is not used as an investment property as its primary function. This means that you should not use the property to rent it out. And while the owner may rent out the secondary home from time to time, the main function of the home should be for personal use.
According to the IRS, for a residence to be considered a secondary home, the owner should live in it for part of a calendar year. This could mean living in the secondary home for a few days, weeks, or months in a calendar year. That being said, there is also some vagueness when it comes to the word "secondary" itself. According to law, one is allowed to own more than one secondary home.
What Makes a Second Home?
There are some strict rules and regulations regarding what is considered a second home when it comes to the IRS. According to the IRS, a home is considered a second home if it follows two rules:
- The owner lives in it for a period of 14 days every calendar year
- It is lived in by the owner for 10% of the days that it is rented out for in a calendar year.
Of course, owners have to meet the greater option of the two since meeting the bare minimum will not be regarded.
For mortgage interest deduction, the IRS uses a broad definition of the term "house." According to IRS Publication 936, the Internal Revenue Service regards the boat as a second residence if it provides sleeping, cooking, and bathroom facilities. Even if you make do with what it has, you can't treat it as a home if one of these elements is lacking. For example, even if you bring enough food that doesn't require cooking, you can't treat it as a house for tax reasons if it doesn't have cooking capabilities.
It is also important to note that you don't have to meet the personal use criteria if you don't hire out the yacht at all. However, if you utilize your boat for a company, even if it's just for one day, the usage restrictions are triggered. You must utilize it for more than 14 days if you only tend to live in the property or 10% of the number of days that the home is rented out if you also use the property to rent it out.
10% of the duration the property is rented out means that if you rent the property out for a week during the year, you must also have utilized it, aka lived in it personally for at least 14 days during the same year.
While it is easy for houseboat owners to declare their boat as a second home and take advantage of tax cuts, there are also some limitations that houseboat owners need to be aware of to benefit from the tax deductions. When it comes to deductions on mortgage interest, one is only allowed to have one "second" house.
If you have two residences, one of which is your regular residence and the other you use as a holiday home, you must replace your boat for your current second home if you wish to deduct your boat. Furthermore, for tax years previous to 2018, joint filers can only deduct any interest on the first $1 million that's part of the mortgage debt.
However, for tax years beginning after December 16, 2017, you may only deduct interest on the first $750,000 of mortgage debt incurred after that date. So, even if you qualify for a boat loan, it won't assist you if you're already above the limit.
Because the houseboat isn't real property, your lender isn't compelled to provide you with a Form 1098. However, it should be noted that interest that is paid on the houseboat loan during an annual year is shown in Form 1098, while interest that is paid appears in 'box 1' when the lender issues you a 1098 form.
Simply fill outline 10 of Schedule A with the amount of deductible interest. This means if you did not receive Form 1098, you will need to either check your financial records. You can also contact your lender to find out how much interest you paid in the previous year. Once you are able to get that information, use line 11 of Schedule A to record the deductible interest.
Claim Your Second Home
The largest tax deduction in recreational boating in the United States is the second-home deduction for interest paid on boat loans. It's found aboard anything from little cuddy cabin runabouts to multimillion-dollar yachts.
When boat builders add the right amenities in tiny boats these days, they keep the tax deduction in mind. In the United States, around 500,000 pleasure boats, or roughly 3% of all recreational boats, are large enough to qualify. However, only around 100,000 people live in houseboats or RVs full time.
So, now that you know all about how you can take advantage of tax deductions, it is time to put your houseboat to good use or get a houseboat if you were on the fence about owning one.