Paying Cash is Paying Too
Much
 Boat
buyers have many choices when it comes to
paying for their purchase, but they always
make the right one?
Here are some tips on how you can determine
if you are making the wisest choice by paying
cash for your boat.... and why you may want
to consider financing your boat instead.
Tax deductibility of interest on yacht
loans
Under IRC section 163 (h)(2) a taxpayer
may deduct any qualified interest on a qualified
residence, which is defined as a principal
residence and one other residence owned
by the taxpayer for the purpose of deductibility
for the tax year. IRC section 163(h)(3)
defines qualified residence interest as
any interest which is paid or accrued during
the tax year on acquisition or home equity
indebtedness with respect to any qualified
residence of the taxpayer.
In accordance with IRC section 163(h)(4),
a boat will be considered a qualified residence
if it is one of the two residences chosen
by the taxpayer for purposes of deductibility
in the tax year as long as it provides basic
living accommodations such as sleeping space
(berth), a toilet (head), and cooking facilities
(galley). If the boat is chartered out,
the taxpayer will have to use the boat for
personal purposes for either more than 14
days or 10% of the number of days during
the year the boat was actually rented, in
accordance with IRC section 280A(d)(1).
Form 1098 is not necessary in order to
receive the qualified interest deduction.
In accordance with IRS instructions for
Schedule A, form 1040, if the taxpayer does
not receive form 1098, deductible mortgage
interest should be reported in line 11 instead
of line 10 on Schedule A.
Borrowing against your unencumbered home
has limitations
Home mortgage interest deduction is limited
to interest paid on mortgage debt used to
purchase or improve a residence, or to refinance
the remaining balance on a purchase or improvement.
If the money isn't used for the home, the
interest expense does not qualify for the
deduction.
So does a home equity loan
Home mortgage interest deduction is limited
to interest paid on home equity loans up
to $100,000. By using a home equity loan,
you may limit the amount of interest that
is deductible, if your boat loan balance
exceeds $100,000.
Borrowing against your stock portfolio
isn't the best answer, either
Second home mortgage interest deduction
is limited to interest paid on second homes
that are secured by that second home. You
would need to have a written collateral
agreement (security agreement) indicating
the boat as collateral, which is probably
not something your broker would be prepared
to provide.
The preceding information was prepared
by Gary Boudreau, Deloitte & Touche,
LLP, Newport Beach, California.
Should I Finance?
In the example below it's easy to see that
investment earnings can far exceed the cost
of marine financing. In this particular
case we are assuming a rate of 8.5% fixed
for 20 years on a loan of $100,000, requiring
a monthly principal and interest payment
of $867.82.
The interest cost of this loan over an
anticipated life of 60 months is $40,196.30.
If you are in the 30% tax bracket, this
interest expense deduction will save you
$12,058.91, effectively reducing the cost
of the loan to $28,137.39.
This same $100,000, if invested earning
9%, would grow to $137,703.68 (after tax)
in the same time period. Tax-free municipal
bonds yielding 6% could earn $34,885.02
over 60 months. More aggressive investments
could obviously make earnings even more
attractive.
It's easy to see how financing your yacht
could cost you less.
Note: The above example was developed
to help explain the advantages of marine
financing and is not a guarantee of what
is available in the market at any particular
time. Please consult with your financial
advisor about your own personal tax situation.
Content courtesy of National
Marine Bankers Association |
