Effects of New "Tax Cuts & Jobs Act" on RVers

So, I was wondering about the effects of the new tax law and started doing a little research. What did I find?

I found these headlines all over the web on noted RV websites and RV forums: 

"Towable RV owners lose benefit with new tax bill"

"New Bill Takes Away Tax Break For Towable RVs"

"Towable Owners Lose Tax Deduction"

 

The problem, upon digging further, is these headlines are wrong. A press release put out by the RV Industry Association (RVIA) has been mis-interpreted and this has spread across the web.

The House bill wanted to eliminate the mortgage interest deduction on all "second homes", but the final bill keeps it in and it has been long established that a self-contained RV, motorhome or towable, is a qualified home for the purpose of deducting interest. Nothing has changed.

However, people picked up on the following language from the RVIA press release and interpreted it to mean that motorhome interest is still deductible but not towable interest.

The conferees modified the definition of motor vehicle under the floorplan indebtedness provisions by deleting the current specific references to “an automobile, a truck, a recreational vehicle, and a motorcycle” and substituting the phrase, “any self-propelled vehicle designed for transporting persons or property on a public street, highway, or road,” without realizing that this would have the effect of removing travel trailers from the definition. RVIA will work with the House Ways and Means Committee and the Senate Finance Committee to include a change to the definition in a technical corrections bill which will likely be needed next year as other oversights and unintended consequences become known.

That language refers ONLY to the following section of the new law. 

PART IV—BUSINESS-RELATED EXCLUSIONS AND DEDUCTIONS
SEC. 13301. LIMITATION ON DEDUCTION FOR INTEREST.

You can read the entire law here: Tax Cuts and Jobs Act.

That's very specific to the interest on floorplan loans - the types of loans dealers get to rotate inventory. It is a big deal for RV dealers that sell trailers, but it has nothing to do with consumer loan interest.

 

In the section about mortgage interest deduction - SEC. 11043. LIMITATION ON DEDUCTION FOR QUALIFIED RESIDENCE INTEREST - there is nothing about changing the definition of a qualified residence nor anything about RVs, motorized, or otherwise.

So, once again, a bunch of incorrect information has been spread across the web related to RVs and people repeat it because it's from "reliable sources". I'm surprised that no one from RVIA has set the record straight. Certainly, it isn't their fault - their language specifically says "under the floorplan indebtedness provisions".

It just didn't sound right, so it only took me a couple of Google searches and actually reading the law to discover the headlines at the top of the page were wrong.

 

Okay, so what does the "Tax Cuts and Jobs Act" change as far as RVers go?

Some of the biggest changes are in the itemized deductions. Because many of us full-time RVers don't have a mortgage interest deduction on a house (because most of us don't own houses), a lot of us don't itemize deductions anyway, so for full-timers many of these changes in itemized deductions don't affect us.

But for the 30% of taxpayers as a whole that itemize there are a few things that might affect RVers or those considering the purchase of an RV. So let's look at those.

Itemized Deductions

Mortgage Interest Deduction

As I stated above, a self-contained RV of any kind can still qualify as a "qualifed residence", either a first or second home, and you can still deduct the interest on the loan. Of course, that only helps if you have enough itemized deductions to itemize.

However, you can only deduct the interest on loans up to $750,000 in total (down from $1 million). So, if you already have a $750,000 mortgage, you would NOT be eligible to deduct the interest on the financing of an RV or any other second home. If you have a $500,000 mortgage, you would be eligible to deduct interest on an additional $250,000 loan.

Now, many people have used home equity loans to finance RVs and home equity loan interest was deductible. However, the new law eliminates the home equity interest deduction.

 

State & Local Tax Deduction

The original drafters of the bill wanted to completely eliminate state and local tax deductions (income tax, property tax, sales tax, etc.). However, the final law keeps these deductions, but then limits them to a total of $10,000.

Now, keep in mind the law currently says:

If you file a Form 1040, and itemize deductions on Schedule A, you have the option of claiming either state and local income taxes or state and local sales taxes (you can’t claim both). If you saved your receipts throughout the year, you can add up the total amount of sales taxes you actually paid and claim that amount.

That part of the law doesn't change - you can deduct either income taxes or sales taxes but not both. So it comes down to whether or not your sales taxes in the year of buying an RV provide you with a better deduction than income taxes.

In either case, you are limited to a total deduction of $10,000 whether it be income taxes, real property taxes, and personal property taxes OR sales taxes, real property taxes, and personal property taxes.

 

There are other changes in the itemized deductions, but I'm trying to concentrate on the ones I can relate to RVing without too much extrapolation.

 

Standard Deduction & Personal Exemptions

The Standard Deduction is increased from $12,700 to $24,000 for married taxpayers ($6,350 to $12,000 for singles). Now that seems like a great thing for those of thus that didn't have enough itemized deductions to itemize, and it is. But, the new law also eliminates the $4,050 personal exemption, so it's good, but not as good as it might appear at first glance.

So, for 2017 as a married couple, we'll have a $12,700 standard deduction plus two $4,050 personal exemptions ($8,100) for a total of $20,800 reduction in Adjusted Gross Income to get to Taxable Income. In 2018, we'll just have the $24,000 standard deduction.

Don't get me wrong, I'm not complaining. That's $3,200 less in Taxable Income in 2018 for doing nothing.

I just point it out because a lot of the talk has been about the "almost doubling of the standard deduction", but they don't always mention how much of that is offset be the elimination of the personal exemptions.

 

The above doesn't have much to do with being an RVer, but I threw it in there because most of us full-timers are already using the standard deduction and I wanted to show how the new law changes it.

Certainly, with the limitation of state and local tax deductions and the increase in the standard deduction, it will be harder to itemize, and quite a few more people, even those that are not RVing, will be electing the standard deduction.

 

Other

I'm not going to get into the new tax brackets or some of the other changes that affect families or the other changes. There are plenty of other websites that summarize the changes that affect most people. But check several of them to make sure they agree.

Before I sign off, I will say that there is a provision in the new law - PART II—DEDUCTION FOR QUALIFIED BUSINESS INCOME OF PASS-THRU ENTITIES - that could be very beneficial for those of us that are operating a small business. It's very complicated, and I won't even attempt to explain it here. I'll just hope that the tax preparation software people figure it out by the end of the year, and it's something all of our RVing friends with business may want to keep an eye on. 

 

Anyway, I just wanted to dispel another internet myth and provide a little info about the new tax bill as it relates to our audience.

---

 

 

Comments

[Julie]

Thanks for the validation. I, too, read that they will eliminate the personal exemption, thereby, doubling the standard deduction is not as great as it sounds. Everyone I told this to said aren't they the same thing, and didn't get it.

[Caroline]

Thanks for the explanation on the second mortgage interest. You always make things so clear and I do appreciate that.

[Mike Stidham]

Thanks for taking your time to provide this information. I have been researching a bit myself without much understanding.

[cori & greg]

As always, thanks for the info!!

[Tracy Perkins]

Thanks Howard. I appreciate your researching the issue and weighing in. I can always trust your information which is much appreciated.

[Mike Volentine]

Thanks for the info. Did not know that about doing away with the personal exemptions.

[Bill]

Howard, your professional insight is helpful. For very small, i.e. personal businesses such as many RVers operate, the $100,000 pass through should be a big deal to their advantage as we understand the law. Let us also remember that for many of us our tax rate will also go down for now. That is the percentages will be decreased. However, for those that purchase an RV / truck, etc. in some states the total sales / state tax deduction limit of $10,000 could be exceeded if one also owns a home that is highly taxed. One's state of residence is very important for all things RV.

I will posit most of us will have smaller overall tax bills. We'll see. Naturally, YMMV.

We agree about the tax software. We've found over the years its effectively just as good, sometimes better and much less expensive, as most, not all, "professional" tax preparers. As always, "It depends."

None of the above is political. Its just math.

Bill

[Jim Clark]

Thanks Howard. I really appreciate the way you drill down into subjects that may affect us RVers, and you have the admirable ability of making these subjects understandable.