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Tax Changes For Boaters

Comprehensive tax changes were made in 2018 and, fortunately for boaters, the news is mostly good. Here's what you need to know.

Tax illustration

Photo: Getty Images/LLGorko

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.

Can You Avoid Paying Sales Tax?

Some boaters who've heard about no-sales-tax states, such as Delaware, wonder if they could just eliminate sales tax altogether if they buy a boat there. "Sure," Says Fodera. "If you keep your boat in Delaware. But if you decide to move it to Virginia, or anywhere else, you'll trigger the sales tax in that state." Even if you keep a boat in Delaware and reside in, say, New Jersey, that state may try to collect sales tax on the boat, says Fodera.

Fortunately, some state sales tax laws encourage boating. Last year, Connecticut cut the sales tax from 6.35 percent to 2.99 percent on boats, boat trailers, boat motors, and marine dyed diesel fuel. Other states are not so friendly. Washington has saddled recreational boaters with an excise tax that is not collected in a similar manner from other user groups. Annual vessel registration fees there include a tax equal to one-half of 1 percent of the market value of any recreational boat. These taxes aren't earmarked for improvements to boating infrastructure but are simply absorbed into the general fund for Washington.

While the only things certain in life may be death and taxes, one more thing that you can probably count on is that tax laws will change. Last year's laws, for example, expire after the 2025 tax year.

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.

Tip: For more details on the mortgage deduction on boats that qualify, go to IRS.gov. For more details on the mortgage deduction on boats that qualify, download IRS Publication 936.

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."

Have A Deductible Boat Loan?

Ask your lender for form 1098. Some boaters may be unaware of the potential tax benefit because not all lending institutions send borrowers the form that reports interest paid on loans, such as a second-home mortgage. Not receiving the form does not preclude taking the deduction though. If a 1098 is not available, boaters should contact their lender for the amount of interest paid and enter it on line 11 on Schedule A along with the lender's tax ID number. If a form 1098 is sent, boaters should simply enter the amount on line 10 of Schedule A.

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.

Thinking Of Donating Your Boat?

The BoatUS Foundation for Boating Safety & Clean Water counts on donations to keep its boating programs afloat. One way to make a difference is to donate your boat or yacht. The BoatUS Foundation will ensure the donation process — from handling the paperwork to picking up the boat — runs smoothly. In addition, donors can be sure that their donation will go to programs that help keep boating a safe and enjoyable pastime for generations to come.

Donate your boat or yacht to the BoatUS Foundation for Boating Safety & Clean Water and receive the maximum allowable tax deduction. It also accepts personal watercraft, trailers, and tow vehicles. If you have a well-loved or gently used boat in good working condition, call the foundation's partner, Certified Sales Inc, at (401) 732-6300. Working with Certified Sales will ensure that your donation will be maximized to benefit both you and the BoatUS Foundation. Potential donations must be titled or documented and free from all encumbrances. BoatUS.org/Boat-Donations

Charles Fort

Charles handles our exclusive Reports in-depth tech feature in every issue, our videos, and our investigative features. He helps with dispute-mediation and writes our Consumer Protection column. A member of the National Association of Marine Surveyors, he’s on ABYC tech committees, and has a 100-ton U.S. Coast Guard license. A sailor who went cruising with his family, he now lives in California.