Do You Have to Pay Taxes on a Boat?

Owning a boat carries potential tax obligations that can arise at the time of purchase, on an annual basis, and when the vessel is sold. Understanding the different types of taxes that may apply is part of making an informed financial decision. This guide provides an overview of the tax considerations for boat owners in the United States.

Sales and Use Tax on Boat Purchases

The most immediate tax when buying a boat is the sales tax, levied by state and local governments as a percentage of the final sale price. The rate varies significantly across the country, as it is determined by the state, county, or city where the transaction occurs. Some states may also cap the amount of sales tax collected on a vessel.

A use tax applies when a boat is purchased in a state with a low or zero sales tax rate but is then brought into the owner’s home state for use. The purpose is to prevent residents from evading their local sales tax. For example, if you buy a boat in a state with no sales tax but register it in a state with a 6% tax rate, you will owe a 6% use tax to your home state.

State revenue agencies track boat registrations to identify vessels purchased elsewhere. The owner is responsible for reporting and paying this tax, often through a form provided by the state’s department of revenue.

Annual Personal Property Taxes

Some boat owners face a recurring annual personal property tax. This tax on movable assets like boats is only levied in certain states and localities, depending on where the boat is docked or stored.

In jurisdictions that impose this tax, the local tax assessor’s office sends an annual bill based on the boat’s assessed value. This value depreciates as the boat ages.

Local assessors determine the boat’s value using standardized industry guides. This assessment is then multiplied by the local millage rate to calculate the final tax bill, which can vary dramatically from one county to another.

Capital Gains Tax When You Sell

When you sell your boat, you may face federal and state income tax. A boat used for personal enjoyment is a capital asset, and if you sell it for more than its “adjusted basis,” the profit is a taxable capital gain.

The adjusted basis is the original purchase price plus the cost of major improvements. For instance, if you bought a boat for $50,000 and spent $10,000 on a new engine, your adjusted basis is $60,000. Selling it for $70,000 results in a $10,000 capital gain to report to the IRS.

The tax rate on the gain depends on how long you owned the boat. Profit from a boat owned for more than one year is a long-term capital gain, taxed at rates based on your income. A loss from selling a personal-use boat is not deductible.

Boat-Related Tax Deductions

A boat can generate tax deductions under specific circumstances. One opportunity is the second home mortgage interest deduction. For a boat to qualify as a second home for the IRS, it must have sleeping, cooking, and toilet facilities.

If the boat meets this definition and you took out a loan to purchase it, the interest paid may be deductible on your federal income tax return, provided you itemize deductions. This deduction is subject to the same limitations as a traditional second home, with the IRS limiting the total mortgage debt to $750,000 for a primary and second home combined.

Another avenue for deductions is through business use, such as a charter service. This requires operating with a genuine intent to make a profit, which the IRS defines as having a profit in at least three of the last five years.

A portion of operating expenses may be deductible in proportion to the boat’s business use. These expenses can include:

• Fuel
• Maintenance
• Insurance
• Dock fees

Meticulous record-keeping is necessary to separate personal use from business activities and to substantiate all claims. While client entertainment costs are not deductible, some business meal expenses may be. The cost of business meals is 50% deductible if the expense is not lavish and the owner or an employee is present.