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Clients Can Sail Off with Boat Mortgage Deductions

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Jul 11th 2018
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The new Tax Cuts and Jobs Act (TCJA) muddies the tax waters for mortgage interest, but if your clients qualify, they can now write off interest incurred for a boat or other vessel they use primarily for recreation this summer.

Briefly stated, deductions are reduced or even eliminated for certain mortgage interest expenses, beginning in 2018 and lasting though 2025. But they still may be able to navigate around the latest tax obstacles.

Let’s start with this basic premise: You can now deduct mortgage interest for a principal residence and one other home -- such as a vacation home by the shore or a lake – if the payments constitute “qualified residence interest.” Prior to the new law, deductions were available, within certain limits, for interest that qualified as either “acquisition debt” or “home equity debt.”

1. Home Equity Debt

When it is allowed under state law, you could also deduct the interest on home equity loans, regardless of how the proceeds were used. For instance, you might arrange a home equity line of credit for personal purposes like a buying a new car or taking a vacation.

The deduction was allowed for interest paid on the first $100,000 of home equity debt, but this deduction has been completely eliminated by the TCJA, beginning in 2018 and lasting through 2025.

However, note that a home equity loan may technically qualify as an acquisition debt if the proceeds are used to substantially renovate a qualified residence. Therefore, if your client takes out a new home equity loan to add a swimming pool to their backyard, the interest is deductible as long as the amount remains below the new threshold.

The definition of a “residence” goes beyond regular dwellings. According to the IRS, this includes “a house, condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities.” For instance, if your client takes out a loan to buy a boat with a galley, sleeping quarters and a head, the interest paid on the loan may be deductible. But you won’t qualify if you merely throw a cot or sleeping bag on board.

2. Acquisition Debt 

This is a debt where the mortgage proceeds are used to buy, build or substantially renovate a home. Typically, it includes the interest being paid on the main home where you live year-round.

Previously, you could deduct the interest paid on the first $1 million of acquisition debt, but the TCJA lowers the threshold to $750,000, beginning in 2018 and lasting through 2025. But interest that continues to be paid on pre-2018 debts is “grandfathered” under the new law.

There is one last provison: Mortgage interest deductions are claimed by itemizers on Schedule A. Under the TCJA, many taxpayers who have opted for itemized deductions in the past will be claiming the standard deduction instead. Essentially, this is because several other itemized deductions have been reduced or eliminated, beginning in 2018 and lasting through 2025, while the standard deduction has been doubled to $12,000 for single filers and $24,000 for joint filers.

In other words, if your client no longer itemizes deductions, they won’t be able to cash in on this unique tax break. For others, it’s smooth sailing ahead.

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