Living in a houseboat which is also my business too. What is the effect on taxes owed.

[laoying1]

I have a friend considering buying a houseboat and living on it. He wants to use it to film his life on the boat that will be his business, it will be a youtube business where he films his life on the boat. For the IRS to consider that a business, is having the youtube channel enough? Does he need to sell T-Shirts, coffee mugs etc.?

If it is considered a business, the IRS lets him use 179 or Bonus depreciation when he buys it according to this link:

https://www.fuoco.cpa/keep-your-boat-afloat-with-tax-breaks/

In addition, it will be his primary residence.  As his primary residence, this link informed me that he can write off the mortgage interest and is eligible for the married filing jointly $500,000 tax exclusion on gain on sale of primary residence:

https://blog.turbotax.intuit.com/tax-deductions-and-credits-2/home/can-my-boat-or-rv-be-claimed-as-a....

So, now I am a little confused. If you treat the entire boat as a 179 writeoff when you buy it, are you double dipping if you then claim primary residence exclusion when you sell it? How does the home office deduction fit in to all of this? Is the entire houseboat his home office? Can he take a home office deduction if he already wrote it off in the first year as a business expense? Can you write off business repair expenses (or what about repairs that extend the life of the boat?)

I guess I am just really confused how the houseboat is treated? Do you pick it as a business 179 expense or treat it as a primary residence and use the entire boat as a home office (or can you do both).

[ErnieS0]

The IRS considers a business to be an activity where the primary motive is to make a profit and where the activity is operated in a business-like manner. Filming your life may be enough. You do not have to sell t-shirts and accessories.

The IRS can classify a business as a “hobby” if it fails to make a profit in three out of five years on a continuing basis (you reset and count back every year).

See: Business or Hobby? Answer Has Implications for Deductions

To claim depreciation on the houseboat, you would have to section off a portion that is only exclusively for business. If your friend is filming his life, this may be hard to do.

The same applies for the home office deduction. You can only claim a home office deduction for a space used regularly and exclusively for a home office. The home office deduction includes both expenses and depreciation. If the business portion is completely expensed, there would be no annual depreciation write off.

A boat does qualify as a “primary residence” so you can write off mortgage interest. 

You can claim the home sale exclusion, but any amount written off would be subtracted from the cost basis. In addition, you will recapture deprecation in the section of the boat designated as a business property.

Any repairs and/or improvements would be prorated, with only the business portion being deductible.

[laoying1]

Thanks for your detailed answer. I had a question on this part:

"The same applies for the home office deduction. You can only claim a home office deduction for a space used regularly and exclusively for a home office. The home office deduction includes both expenses and depreciation. If the business portion is completely expensed, there would be no annual depreciation write off."

Is this a combination of both methods (I can take the purchase of the Boat as a 179 business asset and also take the benefit of treating the Boat as my primary residence)? I believe one could do both.
If I buy a boat for $100,000 and let's say I take a 179 for the 95% of the boat and write off 95% of the depreciation. Since I am using both benefits, then I will take homeowner writeoffs like property taxes and mortgage interest because it is my primary residence. Because it is my business as well, I will go with 95% for a home office percentage and write off 95% of repairs (but do I have the choice to write off 100% of business expenses in the Schedule C expenses section since this is my main business). Also, when I take the home office deduction, I believe you are saying that I couldn't write off depreciation because that had already been written off under the 179 when purchased as a business asset. (Is there a way that TurboTax could know this or would I have to use the "Forms" view) Then when I go to sell my home/business asset, how is the gain treated?
Let's say I sell the houseboat which is my primary residence for $200,000. Would the $100,000 gain be tax free capital gain because of the Home Sale Exclusion of $500,000 for married filing jointly? OR would I have to deal with Depreciation Recapture and get taxed on $95,000 at 25% (I believe Ordinary Gains are taxed at 25%)

[JeffreyR77]

The Home Sale Exclusion will not apply to the potion of the boat that has been treated as your business.  You will have depreciation recapture that will be taxed as ordinary gain.

IRS Publication 544 Sales and Other Dispositions of Assets (see Chapter 3 ...Depreciation Recapture)...