Purchasing an RV or a travel trailer can be a significant investment for most families. An RV or a travel trailer is an investment in the freedom to travel, explore and find the perfect getaway. If you are a family looking to squeeze in a few more family trips each year, a couple enjoying some travel time together, or a person using the RV for business, you may just qualify for this tax break that can put a little ease to the significance of such an investment.
In short, you can, in most cases, deduct the interest paid on the loan used to purchase your travel trailer or RV when preparing your taxes.
As I sat with the RV dealer and the finance manager when purchasing my first travel trailer, they seemingly joked about the “extra benefits” of purchasing a travel trailer or RV. Among all the things we talked about, I kept thinking about this “extra benefit” they spoke of. Circling back to that, the finance manager explained that the interest on an RV or travel trailer loan is tax deductible. Although I had no reason to doubt the finance manager (we can all trust the dealership, right?) I really wanted to check this out for myself.
Several years ago I ditched my tax professional (not sure if that is the best advice but I did it anyway) and began preparing my own taxes. Turbo Tax (not an affiliate or anything, it is just what I happen to use) became my tax preparer. As I worked my way through the different screens and entered my information, I was eagerly awaiting the question, “Do you own an RV or travel trailer?” That question never came.
What does the IRS say?
Diving into the IRS rules governing the deduction of mortgage loan interest would provide confirmation that RV or travel trailer loan interest is deductible. To detect the loan interest of a home, that home must be a qualified home, according to the IRS. Specifically, the IRS states:
“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.”
The definition of a qualified home would seem to include the vast majority of the RVs and travel trailers on the market today. Looking to purchase a truck camper or a pop-up tent camper? Make sure the rig includes sleeping, cooking and toilet facilities. Prior to purchasing a full-size travel trailer, I spent time looking at pop-up campers and truck campers. A number of them made fantastic use of the limited space and did fit in these qualifying facilities in their design.
You may want to check out this IRS publication which can help in understanding the rules about qualified homes.
What kind of loan must be used for the qualifying home?
When purchasing a travel trailer or RV, there are multiple funding sources available. Most people do not have the cash to pay for the unit up front. The new RV or travel trailer can be funded by a secured loan or an unsecured loan.
In order to deduct interest from a loan, the loan must be secured by the qualifying home. A secured loan or debt is one in which you sign a contract or mortgage that makes your ownership of the property security for repayment of the debt. It also gives the financial institution the power to utilize the property to satisfy the debt if the owner defaults. To put it simply, your RV or travel trailer must be used as collateral for your loan.
Sometimes a personal loan is taken in order to fund the purchase. Most personal loans are referred to as “unsecured” loans. These loans do not use the unit as collateral. These unsecured loans usually come with a higher interest rate and it will not qualify for the deduction of the interest from your taxes. This type of loan may be obtained quickly will less documentation. It may also be available to people who have less than perfect credit or have a higher debt to income ratio. It may also be easier to fund a private purchase using this type of loan. Do not fall into temptation and rush to this type of loan.
There are a number of banks and lending institutions which will offer secured loan products. The dealer usually receives an incentive from the lending institutions to promote specific products. Some of the loans they recommend may have a higher interest rate to accommodate the incentive paid to the dealer. Most dealers will dismiss this higher rate by quoting this IRS rule which allows the deduction of the interest when preparing your taxes. Keep in mind, you can, and should, try to negotiate a lower rate or ask to work with another financial institution. You can always do the funding research before walking into the dealer.
RV or Travel Trailer as Second Home
We already discussed how an RV or travel trailer is considered a qualified home by the IRS. Even if you already own a primary home, and you are deducting interest from that home, your RV or travel trailer’s loan interest can be deducted. The IRS allows the deduction of interest on a secured loan used to purchase a second home. You can choose one home to be considered your second home for this purpose.
What if I don’t use the RV or travel trailer all year?
Most people do not use their RV or travel trailer all year long. The unit will continue to qualify as your second home, even when it is parked in storage. Even if you take a year off from camping or traveling, you can still consider it a second home. As long as you are still using it as collateral to secure that original loan, it still qualifies.
What if I rent out my RV or travel trailer?
There are a number of sites or services which offer the ability for people to rent out their RV or travel trailer when they are not using it. Sometimes it makes financial sense to rent out an unused RV. That income can help offset the costs associated with the upkeep and maintenance of the unit. RVShare.com and Outdoorsy.com are just two services which get RV owners connected to those who are looking to rent.
When you rent out your RV or travel trailer the ability to deduct the interest from a loan gets a little bit less cut and dry. According to the IRS, a second home which is being rented out must also be used by the owner part of the year in order for it to still be considered a qualified home. It must be used more than 14 days or more than 10% of the number of days during the year that the home was rented, whichever is longer. In this particular case, I would highly recommend seeking the advice of a tax professional. The tax professional will help you be prepared and provide a roadmap for proper documentation of your rentals.
What if I already have a second home?
If you have more than one second home, you can only treat one of them as a qualified second home during any given year. You can also see from the IRS definition of a qualified home, that a boat could also qualify as a second home. If you own both a qualifying boat and an RV, it would be prudent to thoroughly investigate the best option regarding tax benefits prior to beginning your tax returns.
You may take several factors into consideration when deciding which loan to use as your second home. First look at the loan. What is the balance of each loan? A higher balanced loan will usually accrue more interest paid during the year. Next look at the interest rate of each loan. A loan with a higher balance may actually pay less interest throughout the year if there is a substantial difference between the two interest rates.
The financial impact if RV or travel trailer ownership can clearly be lessened through legitimate tax breaks. A little due diligence when purchasing an RV or travel trailer can ensure you are provided the best possibilities in regard to the tax breaks associated with ownership of an RV or travel trailer.
To ensure you are able to benefit from tax breaks, make sure the following applies to your RV or travel trailer:
- Your trailer has a permanent sleeping facility.
- The unit has a cooking facility.
- There is a toilet facility/bathroom.
- The loan is secured by the unit being financed.
- You are not using any other home as your second home.
- If you are renting it out, consult with a tax professional.
Disclaimer: I am not a tax professional. I am just another travel trailer owner who had to figure things out for himself. If you have any questions regarding the ability to deduct loan interest, please consult with a tax professional.