The siren call of boat ownership is easy to understand, here in South Florida. On a hot summer day, or even a crisp winter afternoon, getting out on the water for some sailing, fishing, snorkeling or water skiing can seem like the perfect reason to take the plunge.
Florida, and in particular the Greater Fort Lauderdale area where I live and work, is a major center for the motor yacht and boating industry. In South Florida, about 136,000 people currently work in the industry. According to industry figures for 2014, 19 percent of the over 30,000 boats sold in the U.S. that year were sold in Florida.
If you are ready to invest in a boat of your own, whether a modest fishing boat or a high-end yacht, it is worthwhile to pause and consider the tax implications, wherever you may live. Depending on the ways in which you intend to use your new watercraft, that impact could be minimal, or it could significantly change your overall financial picture.
Taxing Boat Sales
As with any big-ticket purchase, you should keep sales tax in mind when you are ready to buy your vessel of choice. There is no federal vessel tax, and federal luxury tax was repealed in the 1990s, so Uncle Sam does not take any particular interest in whether or not you choose to buy a boat. The states, however, want their cut. Every state is different, so be sure to take the time to understand any particular quirks in state law before you buy.
In Florida, for instance, boats are subject to the state sales tax rate of 6 percent, in addition to any local taxes. However, as of 2010 Florida has capped this tax, limiting it to the first $300,000 of a boat’s purchase price. Thus, under current law, Florida will not collect more than $18,000 in sales tax on your new vessel. In addition, many Florida counties impose a discretionary sales surtax, which can apply to the first $5,000 of the purchase price. These sales tax caps make buying a high-end boat more attractive in Florida.
The Florida Legislature’s revenue estimating committee projected in 2010 that the tax cap would cost the state as much as $1.4 million in the first year.
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Instead, tax collections on yacht sales in the state rose more than $13 million in that time. Buyers who previously spent large sums to form offshore companies in order to skirt the state tax found it cheaper and easier to simply pay the Florida tax outright. So before you buy a boat, consider whether you can get a better deal by buying and berthing it in another state.
The cap on boat sales tax was so powerful that other states are competing by passing caps of their own. Recently, Maryland, New Jersey and New York all passed or are considering passing laws to cap the tax on boat sales. Depending on your politics, you may consider this an unnecessary tax break for the wealthy boat-buying class, but based on the increase in tax revenue after Florida’s cap went into effect, you can also see how lowering taxes and state competition can sometimes lead to long-term economic benefits. More boat sales in Florida lead to more employment and growth in marine-related industries in the region.
For whatever sales tax you do pay on your boat purchase, you may be able to realize some benefit when filing your federal income taxes. Assuming you itemize your deductions, you can deduct local sales tax in lieu of claiming state and local income taxes. Especially in states – like Florida – that do not levy a personal income tax, this can represent a significant deduction. The main calculation of the general sales tax deduction is based on your adjusted gross income, but you can add sales tax paid specifically on a car or boat purchase to that amount.
Make sure you also understand how a state’s use tax may impact you. For the typical recreational vessel, use tax will not matter, because sales and use tax are mutually exclusive – if you pay sales tax on a transaction, you cannot also owe use tax. That said, if you plan to use a watercraft primarily in a different state than the one where it was purchased, it is worth taking the time to make sure you understand your home state’s rules and that your documentation is in order so you do not end up a target for overzealous state tax authorities.
You should also educate yourself on state and local taxes related to a watercraft which may apply on an annual or ongoing basis. Certain states and local authorities levy personal property taxes annually on boats docked within their jurisdictions.
On the other hand, some states offer particular tax breaks to boat owners. For example, last year Florida passed a law limiting the sales tax on boat repairs to no more than $60,000, or the first $1 million of repair costs. Like the sales tax cap on boat purchases, the law is intended to allow Florida to maintain its status as a leader in the marine industry. The hope is that the cap on boat repair sales tax will attract and retain repair and refit business for luxury yachts and other high-end boats in the state, thereby increasing revenue and employment, bolstering the local economy. If you own a yacht in a high-tax state, it could make sense to cruise it down to Florida for major repair work to save on taxes. Some states even offer a tax credit on fuel used for recreational boating. Yes, even the boating industry has a strong lobby group to push state legislators for tax breaks.
Living On Your Boat
While it makes sense to think of your vessel in the same way you might think of a car or recreational vehicle, there is another way to characterize it. In some cases, a boat can plausibly serve as a second home, meaning it can offer deductible home loan interest. In order to qualify, the vessel must include cooking, sleeping and toilet facilities; do not try to convince the Internal Revenue Service that you live on your jet ski.
There are a few other caveats. The deduction is on mortgage interest secured by the residence, so the deduction will not affect you if you bought your boat outright or used some personal line of credit, such as a credit card. Also, if you are already deducting interest on a second home, you cannot deduct both it and the boat loan interest in the same year, though you may switch between them from year to year if you wish.
A boat may even be your primary residence. Technically, as long as it meets the bed, bathroom and kitchen (or rather galley) test, you can declare your boat to be your main home. Note that if you use your boat for business, as I’ll discuss in the next section, you must divide your home between the part that is your primary residence and the part that is used to generate income. If your boat is your primary residence and it does not dock in the same port regularly, you may face a tricky tax domicile situation too.
Your Boat As A Business
Many boat owners use their boats to earn income, either on the side or as their main business. Depending on your situation, you may decide to use your vessel as a fishing charter, to run scuba or snorkeling tours, or to serve as a private ferry. As with a land-bound venture, you will need to take care to steer clear of the IRS’ hobby-loss rules by proving your genuine intention to make a profit, rather than just cover the costs of your time out on the water.