Boats and Taxes. Deductible or Not?

Until the late 1980s, loan interest was considered tax-deductible. It didnt matter if the interest was for an auto, airplane, home or boat, it was all considered deductible.

In 1987, though, Congress started to tighten the screws on deductibility, although no one said so at the time, there were many who believed that people were hiding their true wealth behind such deductions and so it was the responsibility of Congress to obtain as much of that hidden wealth as possible.

Suddenly, interest on car loans became taxable, as did interest on credit card purchases and the like -- many deductions that big business had come to depend on to keep its profits and ensure that it ended up paying no taxes remained in place, funnily enough; the middle class, like usual, took the brunt of the loss.

Many in Congress, at the time, wanted to make all consumer interest taxable so that if you owned a home and had been taking the deduction offered by the home mortgage that deduction would have disappeared and the public temper probably would have reached its boiling point. So, cooler heads in Congress devised a formula that made a portion of the interest you paid on your mortgage deductible, while they also figured that anyone who had purchased a home before Jan. 1, 1987 shouldnt be penalized for their purchase.

The result was a certified public accountants nightmare and bonanza as they had to not only keep up with the changes in the law, but they also had to deal with changes in their clients taxes and tax returns so for them it was a double-edged sword; they had to remain up on the latest changes in law on the one hand and that wasnt cheap, while, on the other, they had to advise their customers and work with them to achieve the proper balance.

There was something unusual about the 1987 law that had many people scratching their heads at the time and which still leave people with looks of wonder on their faces. Congress left the deduction for boats, used as homes, in tact.

In other words, if a boat had:

A galleyFully serviceable beddingFully serviceable toilet facilities

it would be considered a home, for purposes of the 1987 law, and all interest on any loan or mortgage needed to purchase the boat became fully deductbile.

At the time, the luxury boating industry was suffering through one of its worst recessions in history and sales of boats larger than 35 feet were really lagging and Congress felt it had to do something to get sales of larger and more profitable craft back on track. Plus, there was a strong message to Congress from many of those who already owned 50-footers and larger boats. The message was simple: We live on our boats; theyre not just pleasure craft, but they are our homes and many of us purchased them some years ago, so taxing us, while giving land-based homes the same kind of grandfathered break would not be fair! (Grandfathering is the act of leaving earlier sections of a law untouched, while changing later sections.)

Congress, actually in its wisdom this time around, did a good thing in that it left the grandfather clause in place for any large boat purchase so long as the boat could serve as a home. The result was that sales slowly began to turn and more and more people made use of their boats as their homes.