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Tax Byte
The final regulations keep the framework of the January proposed regulations. Treasury refused requests to admit negative equity and nearly new vehicles, and to test final assembly by make and model rather than by VIN. Here is what did change, and what starts for 2026.
Heavier Vehicles Qualify
Prop. Reg. §1.163-16(b)(13) defined vehicle types by EPA classifications that carried their own weight ceilings, shutting out an SUV above 10,000 pounds GVWR, a pickup above 8,500 pounds GVWR, and a motorcycle with curb mass above 1,499 pounds. Final §1.163-16(b)(14) drops those ceilings, leaving only the 14,000 pound limit of §163(h)(4)(D)(vi). Heavier three-quarter ton pickups now clear the vehicle type requirement.
First Lien and Original Use
Final §1.163-16(b)(15) looks to the first voluntary security interest recorded against the vehicle and disregards involuntary liens, such as mechanic’s or state tax liens, that take temporary priority later. Under new §1.163-16(e)(2)(ii), original use does not begin with a dealer holding a vehicle primarily for sale, so a demonstrator can still be new to the retail buyer; a dealer’s service loaner generally cannot. New §1.163-16(e)(2)(iii) addresses co-purchasers: when one takes first delivery, each is treated as the first to take delivery.
Loan Amounts
New §1.163-16(b)(6) expands customarily financed items to include mechanical repair coverage; tire, wheel, paint and interior protection products; extended warranties; GAP insurance; credit related accident, health and life products; key fob replacement; title and registration fees; and accessories that are components of the vehicle. Negative equity stays out and pro rata allocation is mandatory (new Example 5, §1.163-16(d)(6)(v)), but a down payment applies first to negative equity and other nonqualifying amounts under §1.163-16(d)(2)(iii).
Interest and Refinancing
New §1.163-16(c)(2)(i) confirms that qualified interest includes points, deferred or capitalized interest, origination and financing charges, prepayment penalties, and late and default charges, if the item is interest for federal tax purposes and is reported as interest on the borrower statement. In a refinancing, accrued but unpaid interest rolled into the new note can qualify; products added at that point cannot. A co-borrower added at refinancing does not qualify, but the original obligor still does.
New for 2026: Form 1098-VLI
The relief in Notice 2025-57 covered 2025 interest only, and Treasury declined any phase-in or penalty relief beyond reasonable cause under §6724(a). For 2026 interest of $600 or more, lenders must file a separate form for each loan and furnish it to the payor of record by February 1, 2027, with IRS filing due March 1 on paper or March 31 electronically. The final form adds Box 6 (original use began with the payor of record) and Box 7 (U.S. final assembly). Lenders got no safe harbor on whether a vehicle qualifies, although they may rely on contract information for personal use absent conflicting information. The borrower statement must warn that the payor may be unable to deduct the full amount reported, §1.6050AA-1(h)(2).
Tax Practitioner Planning
Take a second look at 2025 returns. A client told that a heavier pickup failed under the proposed rules may have a refund claim, since those ceilings were never in the statute, and with the October 15 extended due date behind us the fix is Form 1040-X. For 2026, ask every client with a new vehicle loan for Form 1098-VLI and read Boxes 6 and 7, but do not treat the form as the answer. Personal use, the phaseout, and the $10,000 limit are still yours to apply, and only the payor of record receives the form, so ask about co-borrowers. A client rolling negative equity into a purchase should know that cash down clears it first.
Sources:
- Car Loan Interest Deduction, T.D. 10054 (Sept. 8, 2026), effective Nov. 9, 2026, finalizing REG-113515-25 (Jan. 2, 2026)
- §163(h)(4) and 6050AA
- Form 1098-VLI and Instructions
- Notice 2025-57
For more tax developments, visit the Western CPE eTax Alerts page at westerncpe.com/etax-alerts/.
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