Given the challenges we’ve faced over the past couple of years, it seems like everyone in the country could use a well-deserved vacation, don’t you think?
But what if you could have a vacation whenever you wanted? Picture yourself escaping to nature or enjoying the open waters while still enjoying the comforts of home.
This is the allure of a mobile vacation haven, whether it be a boat or an RV. It extends beyond the freedom to explore; it’s an investment in creating unforgettable experiences.
However, before you embark on your journey, it’s important to consider the tax implications of this investment. The tax breaks that once reduced the cost of your investment have changed, and now the benefits depend on how you plan to use your mobile vacation home.
A 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 tax purposes.
However, you may be surprised to learn that the write-offs available in 2023 are more limited than in the past. (For the purposes of this article, we define an RV as any recreational land vehicle, such as a camper van, fifth wheel, or motorhome, and a boat as any watercraft equipped with a bed, toilet, and stove.)
The Tax Cuts and Jobs Act (TCJA) passed in 2017 brought about changes to the rules for deducting mortgage interest, as well as limitations on tax deductions and itemized deductions for most Americans.
Under the TCJA, you can generally deduct mortgage interest on up to two qualified homes, along with any grandfathered debt, up to $375,000 for married taxpayers filing separately, and $750,000 for all other taxpayers. Therefore, if you already have a mortgage on your primary home that is close to the limit, the mortgage interest on a second home, whether it’s an RV or a boat, may not be deductible.
There is also a deduction available for personal property and sales taxes on RVs and boats. However, the TCJA implemented a cap on state and local tax deductions. Specifically, the SALT deduction is limited to $10,000 for married couples filing jointly, and $5,000 for married individuals filing separately or single taxpayers. This limitation could have an impact on the overall tax benefits, especially if you already maxed out your SALT deductions with your primary residence or state income taxes.
One of the most significant changes resulting from the above, in addition to the elimination of exemptions and the increase in the standard deduction, is that most Americans no longer have enough deductions to make itemizing worth it. Instead, they opt for the standard deduction. Therefore, before purchasing a second home, make sure to add up the combined interest on your two homes, the $10,000 SALT tax deduction, and your charitable deductions to ensure you have enough to itemize and take advantage of the deductions.
Although most RV ads claim that you can write off your camper, travel trailer, or motorhome as a first or second home, it is always a good idea to consult with a tax professional. Additionally, since the TCJA is set to expire at the end of 2025, it will be interesting to see if there will be any changes to these rules in the next 18 months.
Renting It Out
Renting out your RV or boat can help generate rental income to offset your ownership expenses, much like a traditional vacation home. The tax implications of this rental income or loss depend on how frequently you rent it out and how it is 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 out for short periods of time.
If you rent out your vacation home for 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 end up with a loss, keep in mind that rental activities are generally considered passive and subject to passive loss rules. These rules restrict 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 fully understand the implications of the passive loss rules and how they apply to your specific situation.
Using It for Business
If you conduct business activities, such as traveling to job sites, completing administrative work, or holding client meetings from your RV or boat when used as a mobile office, you may be eligible to deduct related expenses.
For example, let’s say you own a boat and operate a guided tour business showcasing the scenic beauty of a coastal area or take others on fishing or snorkeling expeditions. Costs associated with your business on the days you operate the tours would be deductible.
In another scenario, some business owners travel and sell their goods at hobby shows, such as woodworking or quilting, and use their toy hauler to transport themselves and their products for sale. Alternatively, a retired entrepreneur might offer makeovers and sell clothes from their motorhome to residents at retirement homes throughout the state.
In these cases, you have the potential to deduct a portion or all expenses related to the maintenance, fuel, docking fees or parking charges, insurance, and depreciation of your RV or boat as business expenses, based on their business usage.
It’s important to note that the IRS closely scrutinizes business deductions, particularly those associated with 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 significant investment decision, considering the potential cost of a motorhome exceeding $100,000. To put things into perspective, you could stay in an average hotel for 500 nights at $200 per night for the same cost as a motorhome. Ultimately, only you can decide if this is a suitable investment for your family.
As Erica Jong wisely said, “Live your life by a compass, not a clock.” Whether you choose to rent or own, it’s time to take that vacation! You’ve earned it.
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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