IRS Finalizes Rules For The New Car Loan Interest Deduction
The IRS has finalized rules for a new deduction that lets some taxpayers write off interest they pay on new car loans.
The deduction, created by the One Big Beautiful Bill Act (OBBBA), applies to qualified passenger vehicle loan interest for tax years 2025 through 2028. The maximum deduction is $10,000 per return (not per person), and the rules apply to loans taken out after December 31, 2024.
Which Vehicles Qualify?
The deduction applies to interest on a loan used to purchase an “applicable passenger vehicle” for personal use. This includes cars, minivans, vans, SUVs, pickup trucks, and motorcycles that meet the statutory requirements, including a gross vehicle weight rating of less than 14,000 pounds.
The vehicle must be new to the taxpayer—used vehicles do not qualify.
The vehicle must also meet a domestic-assembly requirement, meaning its final assembly must occur in the United States. Taxpayers can generally determine this from the vehicle identification number (VIN) and other manufacturer information (taxpayers claiming the deduction must provide the VIN for the qualifying vehicle on the return).
What About The Loan?
The loan must have been taken out after December 31, 2024, for the purchase of the qualifying vehicle and must be secured by a first lien on that vehicle. This means interest on older loans does not qualify, even if most of the interest is paid during the 2025 through 2028 deduction window. Treasury declined requests to extend the deduction to loans taken out before 2025, explaining that the statute limits the deduction to indebtedness incurred after December 31, 2024.
Lease payments do not count as qualified passenger vehicle loan interest, and related-party financing is excluded.
Refinancing can qualify, but only to the extent it refinances the outstanding balance of an otherwise qualifying loan. The refinanced debt must remain secured by a first lien on the same vehicle.
But be careful: one common item that does not qualify is negative equity from a trade-in. If you owe more on your old vehicle than it is worth and that debt is rolled into the new loan, the portion attributable to the old loan is not treated as debt incurred to purchase the new qualifying vehicle.
What Counts As Part Of The Purchase?
The deduction is not necessarily limited to interest attributable to the base sticker price. The final rules allow certain amounts customarily financed as part of a vehicle purchase and directly related to that purchase to be included in the qualifying indebtedness. That can include items such as sales taxes and vehicle-related fees, extended warranties, service or repair plans, GAP coverage, and certain protection products or accessories purchased as part of the transaction. The rules do not, however, turn unrelated financed property into part of a qualifying vehicle loan.
That distinction matters because dealerships frequently bundle add-ons into a single financing agreement. The final rules give taxpayers and lenders more guidance on how much of that debt can produce deductible interest.
What About Personal Use?
The law requires the vehicle to be purchased for personal use, but Treasury did not interpret that to require 100% personal use. Under the final regulations, the taxpayer must reasonably expect, at the time of purchase, that the vehicle will be used for personal purposes more than 50% of the time during the expected period of ownership.
This makes mixed-use vehicles potentially eligible. A taxpayer who uses a vehicle for both work and personal purposes may still satisfy the personal-use requirement if expected personal use exceeds 50%. The regulations look to the taxpayer’s reasonable expectation at the time of purchase rather than imposing a fresh 50% test each year.
Is There A Limit On The Deduction?
The maximum interest deduction is $10,000 per return, not $10,000 per car or per taxpayer on a joint return. A married couple filing jointly has a single $10,000 deduction, even if both spouses have qualifying vehicle loans.
The deduction is available whether or not the taxpayer itemizes. Congress amended the rules so that taxpayers taking the standard deduction can still claim qualified passenger vehicle loan interest.
Is The Deduction Subject To Phaseouts?
The deduction also phases out for higher-income taxpayers. A phaseout means the benefit decreases as income increases. Here, the phaseout begins when modified adjusted gross income (MAGI) exceeds $100,000 for most taxpayers or $200,000 for married couples filing jointly. The available deduction is reduced by $200 for every $1,000, or fraction of $1,000, by which income exceeds the applicable threshold.
That means a taxpayer otherwise entitled to the full $10,000 deduction is fully phased out when MAGI reaches $150,000, or $250,000 for a married couple filing jointly.
How Does This Get Reported?
The law also created new reporting requirements for lenders and other interest recipients. Generally, a person engaged in a trade or business who receives $600 or more of interest during the year on a specified passenger vehicle loan must file an information return and furnish a statement to the borrower. The final regulations clarify that the $600 threshold is determined on a loan-by-loan basis.
That reporting will appear on a new Form 1098-VLI, Vehicle Loan Interest Statement. The form reports information including the amount of vehicle-loan interest and identifying information about the vehicle. However, that doesn’t mean the total amount on the form is deductible. In fact, the form includes a warning:
The amount shown may not be fully deductible by you. Limits based on the amount of interest paid, your income, and the passenger vehicle may apply. Generally, you may only deduct interest to the extent it was incurred by you, actually paid by you, and not reimbursed by another person.
Should You Buy A New Car Now?
If you were planning to buy and finance a new vehicle in 2025 or later, review the rules to see whether you might benefit. But be smart: buying a car solely for the deduction probably does not make financial sense. Only the interest is deductible—not the principal—and both income and dollar limits apply.
Also worth noting? The deduction is temporary. Unless Congress changes the law again, qualified passenger vehicle loan interest is deductible only for tax years beginning after December 31, 2024, and before January 1, 2029. That means the interest on a six-year loan (the approximate average term of a new car loan) taken out in 2026 will be paid long after the deduction expires.
Where Can I Find The Rules?
Treasury and the IRS finalized the details in T.D. 10054, which appears in the September 21 Internal Revenue Bulletin. The final regulations take effect on November 9, 2026, although the deduction applies to qualifying loans incurred after December 31, 2024.
