Is Congress considering eliminating boat loan interest deductions?

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Answered by: Chuck, An Expert in the Current Affairs Category
The Tax Man Cometh?

While the wisdom of the concept might be a topic for legitimate debate, the US income tax code has long been far more than a simple means of collecting revenue. We use the income tax system to create incentives for certain types of behavior, investment, philanthropy, and consumption.

One aspect of the economy driven by the IRS is home ownership. The IRS exempts from taxation any amounts spent for mortgage interest, and especially in the early years of a mortgage this reduces the net cost of house payments by a percentage roughly equal to a home buyer’s income tax bracket. A home buyer in the 30% tax bracket enjoys a nearly $900 tax savings each time he or she makes a $3,000 mortgage payment. The “real dollar” cost of the $3,000 mortgage payment in our example is closer to $2100. That difference between the gross payment and the actual net cost after taxes allows more families to purchase homes, and that in turn creates economic opportunities for builders, developers, furniture and appliance dealers, etc.

The current law permits a tax payer to claim mortgage interest deductions for a second home. There’s an old folk saying that notes a house may not necessarily be a home, and from the IRS perspective a home does not necessarily have to be a house. Boats, motor homes, and travel trailers can all qualify as second homes if they meet some extremely basic requirements for cooking and sleeping arrangements. It is not uncommon for larger boats to be used as a primary residence, but a significant majority of boats are owned by people who live ashore and use their vessel for weekend and vacation excursions.

Although it’s possible to purchase a used family cruising boat for no more than the cost of a fancy new car, newer and larger boats are commonly priced like a house. A few hundred thousand dollars won’t buy the most impressive home in most neighborhoods, or the swankiest yacht in most marinas. The larger, more elaborate and elegant houses and yachts can easily be priced at $1-million, and often require an investment of several times that amount. Whether the family boat represents a $75,000, a $750,000, or a $7.5-million purchase, families shopping in each of those price brackets will often rely on a marine mortgage to make the purchase. A boat loan interest deduction makes the purchase more affordable.

A proposal under consideration in the House Ways and Means Committee, (HR 1702), would eliminate any “second home” tax deductions for interest paid when purchasing a boat or yacht. If the proposal makes it through committee, onto the floor of the House, and if a similar measure is introduced in the Senate, there’s a chance the bill might pass and become law and eliminate boat loan interest deductions. The bill would only affect future boat loans. The interest for any existing indebtedness would remain tax deductible, as would any interest paid on a boat loan for a vessel that was used as a primary residence.

There are some serious problems with the proposal. The three congressmen who introduced the legislation characterize it as a way to “close the yacht loophole” in the tax code. Indeed, interest deductions for summer cabins, motor homes, travel trailers, and anything else eligible under the current tax code would continue, with the specific exception of boats. As is all too often the case, boaters have been singled out for punitive taxation. Non-boaters frequently fail to appreciate that boat owners are not universally wealthy. Most of us are lucky enough to have a boat because we made sacrifices in other areas of life. We may drive older cars, dine out less often and more modestly, and cut back on discretionary spending in other categories in order to afford our pastime. We should not be expected to pay higher effective tax rates than other Americans with similar incomes but different categories of “second homes”.

Without question, raising the effective after tax cost of a boat loan would have serious consequences for boat builders and dealers. Without benefit of the same tax advantage enjoyed by purchasers of summer cabins, motor homes, and travel trailers, prospective boat buyers would often be forced to settle for a less than satisfactory vessel. Some prospective buyers would simply drop out of the market entirely.

Most of us won’t buy a new boat in any given year, but all boaters depend on a healthy marketplace. Brisk trade in new or used boats supports and creates competition within the same infrastructure of goods and services upon which we rely when repairing or maintaining an existing vessel. HR 1702 is a discriminatory proposal that would raise the cost of boating for everyone, and deliver a body blow to an already stumbling marine manufacturing industry.

Seattle congressman Jim McDermott sits on the House Ways and Means committee. Concerned boaters might consider contacting Representative McDermott to express their opinions regarding HR 1702. He can be reached through his web site,

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