IRS Finalizes Car Loan Deduction Details
The 2025 One Big Beautiful Bill Act (OBBBA) introduced the new deduction for auto loan interest more than a year ago—making the cost of financing certain new American-made vehicles at least slightly more palatable for taxpayers. Now, the IRS has finalized regulations that answer many outstanding questions for borrowers and lenders alike. Although the deduction was available for the 2025 tax year, the IRS treated 2025 as a transition year. Because the IRS has declined to extend any transition relief for 2026 and beyond, it's important to understand the detailed rules contained in the regulations—including rules governing reporting obligations and the specifics when it comes to identifying qualifying vehicles and vehicle loans in the first place.
Auto Loan Interest Deduction: Background
The OBBBA added new IRC Section 163(h)(4), creating a deduction for "qualified passenger vehicle loan interest" of up to $10,000 (this amount will not be adjusted for inflation) per year. The deduction is available regardless of whether the taxpayer itemizes or takes the standard deduction, subject to income restrictions.
Qualifying vehicles include cars, minivans, vans, SUVs, pick-up trucks or motorcycles, with a gross vehicle weight rating of less than 14,000 pounds (RVs, trailers and ATVs are not eligible) purchased by the taxpayer for personal use. Final assembly of the vehicle must have been completed in the United States (taxpayers can check the VIN or window sticker to confirm).The original use of the vehicle must have begun with the taxpayer claiming the deduction.
Lenders will be required to provide purchasers and the IRS with information showing the total amount of interest they have received for the tax year.Under new IRC Section 6050AA, lenders who receive at least $600 of interest on a specified vehicle loan during the calendar year must file a Form 1098-VLI, Vehicle Loan Interest Statement, with the IRS and provide a copy to the purchaser (the IRS has released a draft form for 2026). Notably, the IRS is clear that determining eligibility for the deduction always remains the borrower's responsibility.
Final Regs Clarify Vehicle Requirements
The IRS final regulations clarify that a taxpayer purchases a vehicle for "personal use" if it's expected that the buyer expects to use the vehicle for personal purposes more than 50% of the time during their anticipated ownership period. Personal use can include personal use by the borrower, their spouse and certain other relatives. The lender can rely on the loan documentation if it establishes personal use and the lender has no conflicting information.
The regulations also offer clarity on when a vehicle is "new" for purposes of the deduction. The vehicle must be classified as new under the relevant loan documentation. The regulations also clarify that a vehicle can still be classified as new if it was used as a demonstrator by the dealer—so long as the vehicle was purchased by the dealer primarily for sale to customers in the ordinary course of its trade or business.
While demonstrator vehicles can continue to qualify as new, the IRS was clear that service vehicles or loaner vehicles held by the dealer to support their business (rather than held primarily for sale) will not qualify as new for purposes of the auto loan deduction when they're eventually sold to a consumer.
The regulations also address situations involving leased vehicles that are later purchased by the lessee.The IRS confirmed that these leased vehicles are not classified as "new" in the loan documentation if the lessee finances the purchase."Original use" therefore would not begin with the lessee, and the loan would not qualify for the deduction.
Loan Requirements: Qualifying Amounts
When financing the purchase of a new vehicle, it's common for the purchaser to also purchase certain "add-ons" related to the vehicle and roll those purchases into the vehicle loan. Qualifying amounts for the deduction can include more than just the vehicle's base purchase price.Things like service plans, GAP coverage, key-fob replacement plans, sales tax, title and registration fees and even certain accessories can also qualify. Pursuant to the regulations, that's true if they are customarily financed and directly related to the vehicle purchase.
The regulations also address situations where a buyer may be underwater on a previous vehicle purchase, trade in that vehicle and purchase a new vehicle that otherwise qualifies for the deduction.Negative equity from a trade in does not constitute qualifying loan amounts.
Loans that include both qualifying and non-qualifying amounts are subject to a pro-rata rule. Interest and principal must be allocated on a pro-rata basis. Any down payment made by the purchaser is first allocated to non-qualifying amounts.
Refinanced loans qualify for the deduction only to the extent that the refinanced amount does not exceed the remaining balance on the original loan—and only if the loan remains secured by a first lien on the same vehicle. If a new borrower is added, the original borrower remains qualified for purposes of the deduction—but the loan will not be a qualifying loan for the new borrower.
Conclusion
The regulations governing the OBBBA auto loan interest deduction are detailed and complicated. They address both qualification and technical reporting obligations. Both lenders and borrowers should review all relevant documentation carefully to ensure they're complying beginning with the 2026 tax year.