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Read this before you buy a boat or RV – tax laws have changed

July 9, 2023

After everything we’ve been through in the past couple of years, doesn’t it feel like the whole country needs a vacation?

What if you could take that vacation anytime you wanted? Imagine escaping to the great outdoors or enjoying our oceans and lakes whenever you desire while still enjoying the comforts of home.

That is the appeal of a mobile vacation haven, be it a boat or RV. It goes beyond just the freedom to explore — it’s a tangible investment in unforgettable experiences.

But before you set sail or hit the open road, it’s crucial to consider the tax implications of this investment decision. The tax breaks that reduce the cost of your investment have changed and will now depend on how you intend to use your mobile vacation home.

Second home on wheels or on water

According to the IRS, if your boat or RV has sleeping, cooking and toilet facilities, it can qualify as a second home for taxes.

However, it might be a surprise that the write-offs in 2023 are more limited than in the past. (For this article, an RV is any recreational land vehicle, whether a camper van, fifth wheel or motorhome, and a boat is any watercraft, as long as it has a bed, toilet and stove.)

The Tax Cuts and Jobs Act that passed in 2017 introduced some changes to the rules for deducting mortgage interest and limited the ability of most Americans to deduct taxes and itemize deductions.

Under TCJA, you can generally deduct mortgage interest on up to two qualified homes plus any grandfathered debt totaling $375,000 for married taxpayers filing separately and $750,000 for all other taxpayers. Therefore, if your mortgage on your first home is near the limit, mortgage interest on a second home, which can be an RV or boat, may not be deductible.

There is also a deduction for personal property and sales taxes on RVs and boats. However, the TCJA also implemented a cap on state and local tax deductions. The SALT deduction limitation is $10,000 for married couples filing jointly and $5,000 for married individuals filing separately or single taxpayers. This limitation may affect the overall tax benefits, especially if you max out your SALT deductions with your primary residence or state income taxes.

One of the most significant changes resulting from the above, along with the elimination of exemptions and the increase in the standard deduction, is that most Americans no longer have enough deductions to make it worth itemizing. Instead, they take the standard deduction. Therefore, before buying a second home, add the combined interest on your two homes, the $10k SALT tax deduction, and your charitable deductions to ensure you have enough to itemize and take advantage of the deductions.

While most RV ads claim you can write off your camper/travel trailer or motorhome as a first or second home, checking with your tax professional is a good idea. Also, TCJA is set to expire at the end of 2025, so it will be interesting to see if these rules will change again in 18 months.

Renting it out

Renting out your recreational vehicle or watercraft can generate rental income to offset your ownership expenses, just like with a traditional vacation home. The tax implications of your rental income or loss will depend on how often you rent it out and how it’s classified for tax purposes.

According to the IRS, if you rent out your vacation home (including your RV or boat) for 14 days or less in a year, the rental income is generally not taxable. This can be a significant advantage if you only rent it for short periods of time.

If you rent out your vacation home more than 14 days a year, you must report the rental income on your tax return. However, you may be eligible to deduct certain rental-related expenses, such as insurance, maintenance and depreciation, to offset the rental income and reduce your taxable rental profit.

If you have a loss, rental activities are generally passive, subject to the passive loss rules. These rules limit the ability to deduct rental losses against other sources of income, such as wages or business income unless you meet certain exceptions.

It’s advisable to consult with a tax professional to understand the implications of the passive loss rules and how they apply to your situation.

Using it for business

You may be eligible to deduct expenses if you conduct business activities, such as traveling to job sites, completing administrative work, and holding client meetings from your recreational vehicle if used as a mobile office.

Let’s say you own a boat and operate a guided tour business showcasing a coastal area’s scenic beauty or take out others on fishing or snorkeling expeditions. Costs associated with that business on the days you operated the tours would be deductible.

Some business owners travel and sell at hobby shows (like woodworking or quilting) and use their toy hauler to transport themselves and goods for sale. In another example, a retired entrepreneur offered makeovers and sold clothes from her motorhome to residents at retirement homes up and down the state.

In these cases, you could potentially deduct a portion or all expenses related to the RV or boat’s maintenance, fuel, docking fees or parking charges, insurance, and depreciation as business expenses based on the business usage.

The IRS scrutinizes business deductions, particularly those related to mobile offices, and there are specific rules you should be familiar with. It’s advisable to consult with a tax professional who can provide guidance specific to your business.

Owning an RV or boat is a big investment decision. A motorhome can cost $100,000 or more. You could stay 500 nights in an average hotel at $200 a night for the cost of the motorhome. Only you can decide if it is a suitable investment for your family.

As Erica Jong said, “Live your life by a compass, not a clock. “Whether you choose to rent or own, take that vacation! It is probably overdue.

Michelle C. Herting is a CPA, Accredited Business Valuator, and an Accredited Estate Planner. She specializes in succession planning, business valuations, and settling trusts.

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