There are currently at least three ways your clients can write off costs associated with boats this year, assuming they itemized deductions.
1. Mortgage Interest
Generally, you’re allowed to deduct qualified mortgage interest paid on a principal residence and one other home, like a vacation home. Under the TCJA, deductions are limited to interest on up to $750,000 of acquisition debt (down from $1 million) for 2018 through 2025 (Prior loans may be grandfathered).
Be aware that the IRS has a generous interpretation of what constitutes a “home” for this purpose. It includes “a house, condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities.”
Therefore, if your client’s boat has a galley, sleeping quarters and a head, you should qualify. But you can’t deduct mortgage interest by just throwing a sleeping bag or cot on the deck.
2. Sales Tax
The TCJA strictly limits annual deductions for state and local tax (SALT) payments to $10,000 for 2018 through 2025. This includes both (a) state property taxes and (b) state income or sales taxes. If your client buys a boat this year, it may boost the sales tax component of the SALT deduction.
What’s more, if you use the convenient IRS table to compute the sales tax deduction on your return, you can add certain the tax on big-ticket items—including boats—to the standard amount. Alternatively, if you’re diligent and have records to back up actual sales tax paid for your boat and other items, you may come out ahead.
3. Charitable Donations
Maybe you’re upgrading to a bigger boat this year or you’ve decided to give up this hobby for the foreseeable future. In that case, you may decide to donate the boat to a qualified charitable organization. There are a number of charities specializing in this type of donations. Do an online search.
As a general rule, the deduction for the boat is based on its fair market value (FMV) on the date of the donation, assuming you’ve owned the vessel for longer than one year.
You can estimate the FMV for your boat, based on its condition, from an online guide, but it’s better to obtain an independent appraisal from a qualified professional. An appraisal must be attached to your tax return if you’re claiming a deduction above $5,000.
Finally, the tax law also provides benefits if you arrange a “bargain sale” of a boat as opposed to donating it to charity. These are complex arrangements, so providing expert tax assistance is strongly recommended.