Can you deduct your towable RV’s loan interest for 2018?

Let me start off by saying that there has been a lot of bad reporting, sensationalism, and misunderstanding with regard to tax law changes that were part of the Tax Cuts and Jobs Act which became law just in time for the 2018 tax year. It’s bound to happen to some degree when you pass page after page of law, each of which results in pages of regulations and formal interpretations of regulations. I’m not going to talk about the wisdom of the law, or whether you’ve paid more or less than in years past–I’m just going to discuss one thing: Can you still deduct your RV’s loan interest for the 2018 tax year?

When can you deduct interest expenses?

This gets a little heavy looking to statues, so feel free to jump down to “What’s changed?” in the next section. We look to 26 USC §163. In the first paragraph, you’ll find the following:

(a) General rule

There shall be allowed as a deduction all interest paid or accrued within the taxable year on indebtedness.

26 USC §163(a)

So the general rule, at first, says if one paid interest in the tax year, there’s an allowable deduction. Of course, it isn’t that simple, as it’s followed by page after page of exceptions to the rule. The big one, as pertains to personal interest expenses, is in paragraph (h), with a “general rule” that modifies the first general rule:

(h) Disallowance of deduction for personal interest (1) In general In the case of a taxpayer other than a corporation, no deduction shall be allowed under this chapter for personal interest paid or accrued during the taxable year.

So we can’t deduct “personal interest.” What’s personal interest? That’s next:

(2) Personal interest For purposes of this subsection, the term “personal interest” means any interest allowable as a deduction under this chapter other than—

(D) any qualified residence interest (within the meaning of paragraph (3)),

So we’re negating negatives negating other negatives. Let’s recap: interest yes, unless personal. Personal is deductible interest except certain things like interest on a qualified residence interest.

Jump down to paragraph (3) to see what a qualified residence interest is, and we find

(3) Qualified residence interest

For purposes of this subsection—

(A) In general

The term “qualified residence interest” means any interest which is paid or accrued during the taxable year on—

(i) acquisition indebtedness with respect to any qualified residence of the taxpayer, or
(ii) home equity indebtedness with respect to any qualified residence of the taxpayer.
For purposes of the preceding sentence, the determination of whether any property is a qualified residence of the taxpayer shall be made as of the time the interest is accrued.

In short, what we take away from that section is that qualified residence interest is interest on a loan used to acquire a qualified residence. But we still don’t know what a qualified residence is. Several pages later, we have it:

(A) Qualified residence

(i) In general

The term “qualified residence” means—

(I) the principal residence (within the meaning of section 121) of the taxpayer, and
(II) 1 other residence of the taxpayer which is selected by the taxpayer for purposes of this subsection for the taxable year and which is used by the taxpayer as a residence (within the meaning of section 280A(d)(1)).
(ii) Married individuals filing separate returnsIf a married couple does not file a joint return for the taxable year— (I) such couple shall be treated as 1 taxpayer for purposes of clause (i), and
(II) each individual shall be entitled to take into account 1 residence unless both individuals consent in writing to 1 individual taking into account the principal residence and 1 other residence.
(iii) Residence not rented For purposes of clause (i)(II), notwithstanding section 280A(d)(1), if the taxpayer does not rent a dwelling unit at any time during a taxable year, such unit may be treated as a residence for such taxable year.

Oh geez. It’s not as simple as “home”. Let’s dissect it–it isn’t really all that bad. The first part, referencing “principal residence,” refers to a set of qualifications used in the rule for capital gains exclusion. There is nothing in section 121 dealing with the type of residence, only how your use qualifies it and how we establish that you own it. Most full-timers and part-timers for whom the RV is a second home, with ordinary purchases, meet these definitions easily. If you don’t rent it out, it’s still pretty easy. Even the rules if married filing separately are pretty simple: if you have two homes, each of you can claim one of them unless you agree otherwise in writing.

We haven’t established what types of dwellings might qualify, but 26 USC §163 is silent on that issue.

What’s changed?

If you look at the bill, the only thing that changed in all of 26 USC §163 related to mortgage interest was the addition of a temporary section, that applies to tax years 2018-2025, limiting the deduction to mortgages for $750,000 or less, instead of $1 million or less.

In other words, with regard to what vehicles qualify as residences for the purpose of mortgage interest deduction: nothing. Only if you bought an RV after 2017 and took out a loan for more than $750,000 to purchase it will changes in this section affect you.

But, I suppose you don’t have good reason to trust me…

How about a more authoritative source, like the IRS?

Sounds like a good idea. While they’re less focused on changes, so long as we find the appropriate publication, we can read through the rules for taking a mortgage interest deduction for the 2018 tax year. Those rules are found in Publication 936:

For you to take a home mortgage interest deduction, your debt must be secured by a qualified home. This means your main home or your second home. A home includes a house, condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities.

Publication 936, page 4.

You’ll notice it’s pretty broad. Sleeping, cooking, and toilet facilities. Most RVs have no problem meeting that threshold.

For a couple of other sources that ultimately reach the same conclusion, here you go:

So where’s the confusion?

In the waning weeks of 2017, as Congress was debating and editing what would eventually become law, there was ultimately a motive to simplify the tax code. The overarching goal was to reduce the complexities of the code, and with it the burden of filing taxes. To do that meant tweaking the marginal rate structure to assess a lower tax on taxable income, but it also meant including things in taxable income that were once excludable. Cue the special interest army: whether RVIA, the home construction industry, rideshare drivers, teachers, moving companies, manufacturers, importers, exporters, insurance companies, charities, casinos, homeowners, old people–you name it–they all wanted their own special tax treatment. Including tax preparers.

Every one of those groups had something they fought to keep. Never mind that a taxpayer might have more money in their pocket with which to donate to a charity, the charity wanted special treatment. The teachers’ lobbies would have had teachers pay more in taxes overall, so long as they got a deduction for certain school supplies.

The RV industry got scared when a version of the bill in the house (apparently) removed the interest deduction for non-motorized RVs, as reported by CNBC and RV Life Magazine. The headlines “House bill chops tax break for RVs and boats” and “New Bill Takes Away Tax Break For Towable RVs” sound ominous. Even the text of the second one, published after a final bill was signed into law, made it sound like bad news:

Owners of towable RVs—including travel trailers and fifth wheels—can no longer write off the interest on their RV loan as a tax deduction.

RV Life Magazine, “New Bill Takes Away Tax Break for Towable RVs

So how did they arrive at that? They first make reference to a definition of a motor vehicle, appearing in 26 USC §163(j)(9)(C):

However, the bill modified the definition of motor vehicle by taking out specific references to automobiles, trucks, RVs, and motorcycles. These were replaced with the phrase “any self-propelled vehicle designed for transporting persons or property on a public street, highway, or road,” which technically removed towable RVs from the definition.

RV Life Magazine, “New Bill Takes Away Tax Break for Towable RVs

Yeah, they did technically remove towable RVs from that definition. But in the discussion of the requirements for mortgage interest deduction did we ever say that it had to be a motor vehicle? Absolutely not. The definition is completely irrelevant to the question at hand. It might matter to an RV dealer, as it pertains to floor plan interest, but even then only acts to limit an exemption to the maximum allowable interest deduction for a business.

They go on to say, as if in support of the idea that towables are no longer qualified residences for mortgage interest deduction:

“The new bill allows deduction of interest on mortgages up to $750,000 for first and second homes, which can include motorized RVs.”

That statement isn’t false by itself. As we’ve discussed, you can deduct interest on qualified motorized RVs. But you can just as easily deduct interest on qualified non-motorized RVs. Remember, sleeping, cooking, and toilet facilities.

I could perhaps give them a pass. Maybe someone highlighted the change in definition, and someone simply made the leap to the issue of interest deduction. But the cited their source, over at RVBusiness.

RV Business actually laid out the changes fairly well. They showed differences between house and senate bills, proposed changes to the number of residences allowed the special tax treatment, and the total amount of indebtedness that would qualify. But they never, not once, raised the issue of any change that would differentiate between motorized and non-motorized RVs outside of the discussion of floor plan interest.

RV Life Magazine appears to be playing fast and loose with the truth. Maybe there’s an anti-Trump writer that wanted to point out one more bad thing he was responsible for, or maybe something else. I really don’t know. But they couldn’t be more wrong, especially with what they conclude based on their sources.

But that doesn’t explain CNBC’s headline: “House bill chops tax break for RVs and boats.” If you read past the headline, you quickly get to their angle. The house bill, which wasn’t signed into law, would have limited the mortgage interest deduction to one qualified residence. Since many part-time RVers have a conventional home and an RV, under current law (unchanged with the TCJA’s signing), those comprise their two residences for which they are entitled to an interest deduction.

And they’re right, it would have affected many RVers. But it would have treated them the exact same way as it would have treated someone with a vacation home, and still made no distinction between motorized and non-motorized RVs.

My Buddy Said He Could No Longer Deduct His RV Interest

Unless your buddy has one of those really expensive motorhomes we talked about earlier, where a $750,000 cap hurts his wallet, he’s wrong. Other than that cap, if his interest was deductible in 2017, it’s still deductible in 2018.

But that doesn’t mean that it made sense for him to actually take the deduction. With the increased standard deduction, the threshold in itemized expenses to overcome in order to pay less tax by itemizing is considerably higher. A number of other deductions were also eliminated, making it harder to hit that threshold. But he could have itemized anyways–the IRS gives you that option, and sometimes there are valid reasons for doing so. But it means that deducting his RV’s interest would have netted a higher federal tax bill.

Yes, you can.

If you were able to deduct your RV’s interest in 2017, you can continue to do so in 2018. You may be subject to the reduced $750,000 cap, or you may get a better deal by taking the standard deduction. But if you choose to itemize, make sure to list your motorhome’s interest on line 8 of schedule A, just as the IRS instructs. I’m not giving you tax advice, but hopefully with the information provided you won’t need it.

If you still want to read more, stay tuned or visit RV Tailgate Life, which has a decent summary.

Leave a Reply