QUESTION: I own a houseboat. Because I live on it part of the year, I have been writing off the interest payments on the loan I took out to buy the boat, just as I do on the mortgage on my house. Now, I hear that I will no longer be able to deduct the interest expense because yachts and houseboats can no longer be considered vacation homes under tax reform. I'm upset. This is a legitimate deduction, not a phony tax shelter. Do you know whether this information is accurate?--N. T.
ANSWER: You were misinformed. If you can show that the houseboat qualifies as a second personal residence, then you can continue to deduct the interest on the loan used to buy the boat.
Under tax reform, the law continues to allow taxpayers to write off mortgage interest payments on as many as two residences. (Taxpayers owning three or more residences may designate which residence is to be treated as the second residence for interest writeoff purposes.) As the new law is written (the pertinent section of the tax code is 163(h)(5)(A)(i)(II)), a houseboat or yacht is considered a second residence if it meets two tests.
First, it must provide basic living accommodations. That is, it must have sleeping, cooking and sanitation accommodations.
If your houseboat meets that test, then you must be able to prove that you personally use it more than 14 days a year or--if you rent it out when you aren't using it--10% of the number of days you rent it during the year, whichever number is greater. In calculating the number of personal use days, you are allowed to count portions of days and days when your relatives use the boat.
If you can't meet these tests, then your interest payments will be subject to the stringent new limitations on consumer interest deductions.
That means that you add together all of your interest expenses--except those on loans for first and second mortgages--and multiply the total by 65%. For 1987, 65% is all you are allowed to deduct. After this year, the allowable interest expense deduction decreases to 40% for 1988, 20% for 1989, 10% for 1990 and zero thereafter. There is no break for taxpayers who incurred the debt on which the interest is mounting before the new tax law was passed.
Even in the case of mortgage interest on first and second homes there are some limitations under tax reform. Taxpayers are permitted to deduct these interest expenses only to the extent the interest is attributable to loans not exceeding the original purchase price of the residences plus the cost of any home improvements on those residences. Additional interest is deductible if the debt is incurred for educational or medical expenses.
These restrictions apply only to mortgages made after Aug. 16, 1986.
Q: After I gave notice to my employer that I plan to take early retirement, my company's personnel department notified me that they won't begin giving me my money from the company's ESOP plan for five years because I'm not yet age 59 1/2. Are they allowed to do that?--M.P.
A: Unfortunately for your pocketbook, they are.
Laws governing company pension plans give employers up to five years to begin payouts of an employee's share of the company's ESOP, or employee stock ownership plan, if the departing employee is younger than 59 1/2.
You should also know that your employer then has another five years before it has to complete the payout. All of the payments are supposed to be essentially the same.
For employees who are at least 59 1/2 years old when they leave a company with an ESOP--a way for a company to share ownership with its employees and, increasingly, to keep the company's stock out of unfriendly hands--the employer has only a year to begin paying out the employee's ESOP proceeds. But again, the final payment doesn't have to be paid for five years after the date of the first check.
Employers, incidentally, also have the option of paying the ESOP proceeds in one lump sum.