Boat Loan Interest

• If you finance the purchase of your boat with a loan, the IRS allows you to claim a deduction for the interest payments you make in the same way that other homeowners can on their second homes. However, not every boat loan that lenders make available qualifies for the mortgage interest deduction. To qualify, the lender must take a security interest in the boat as collateral for repayment. This means that the written promissory note or contract you sign must clearly provide the lender with an ownership interest in the boat until you repay the loan in full. This allows the lender to foreclose on the boat in the event you fail to make your loan payments.
  
  

Qualified Home Requirements

• In addition to the loan requirements, you must insure that your boat is an IRS "qualified home." All taxpayers can have two qualified homes; the first is always your principal residence, and the second is any additional home you use as a personal residence rather than as an investment or rental property. The IRS allows you to treat your boat as a qualified second home if it has a sleeping compartment and kitchen and bathroom facilities. Essentially, the IRS does not allow the deduction for boats you use periodically for recreation.
  
  

Must Itemize Deductions

• Your eligibility to claim the mortgage interest deduction on your boat is only the first step to saving money on your tax bill. In order to take advantage of the deduction, you must elect to itemize instead of taking the standard deduction for your filing status. Itemizing your deductions is only beneficial when the total you calculate on Schedule A exceeds the standard deduction. If it does, you should make the election and include all interest payments you make on the boat loan.
  
  

Sales Tax Deduction

• Once you decide to itemize your deductions, you should evaluate whether to claim an additional deduction on Schedule A for the sales taxes you paid in the year you acquire the boat. The tax law allows you to deduct the state sales tax payments you make on a boat, even if you treat it as a second home for mortgage interest deduction purposes. However, if you deduct your state sales tax, you cannot deduct your state income tax payments in the same year. Your decision is only binding on the current tax year. Therefore, deducting your sales tax payments in a year you make a large purchase, such as your boat, doesn't preclude you from deducting state income tax in future years.