Tax Byte

IRS Releases Proposed Regulations for “No Tax on Car Loan Interest” Provision Under the OBBBA

Western CPE Staff

On December 31, 2025, the Treasury and the IRS released proposed regulations implementing the “No Tax on Car Loan Interest” provision enacted under the One, Big, Beautiful Bill Act (OBBBA). While these regulations are not yet final, they provide a framework for practitioners advising clients who will be able to take advantage of the new deduction.

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The Deduction Framework

Section 163(h)(4) creates a new exception to the general disallowance of personal interest deductions. Taxpayers may deduct qualified passenger vehicle loan interest (QPVLI) on indebtedness incurred after December 31, 2024, for purchasing new, American-assembled vehicles for personal use. The deduction applies to taxable years beginning after December 31, 2024, and before January 1, 2029. Taxpayers can itemize or take the standard deduction.

Only individuals, decedents’ estates, and non-grantor trusts qualify. Corporations and partnerships cannot claim the deduction.

Deduction Eligibility Requirements

Taxpayers will be eligible for the new deduction if they can satisfy the following requirements:

The financed vehicle must qualify as an “applicable passenger vehicle” (APV).
Original use must commence with the taxpayer—meaning no used vehicles qualify.
The final assembly of the vehicle must occur within the United States.
The vehicle must have a gross vehicle weight rating under 14,000 pounds and be classified as a car, minivan, van, sport utility vehicle, pickup truck, or motorcycle.
At the time of purchase, the taxpayer must expect the vehicle will be used for personal purposes more than 50 percent of the time.
- Note: This determination considers use by the taxpayer, their spouse, or related individuals under 152(c)(2) or (d)(2). Luckily, this is a one-time determination—no annual recertification is required. Differences between expected use and later actual use do not affect eligibility.

Loan Requirements

Under the proposed regulations, a specified passenger vehicle loan (SPVL) includes indebtedness for the APV purchase plus “items or amounts customarily financed in an APV purchase transaction and that directly relate to the purchased APV”—including vehicle service plans, extended warranties, sales taxes, and vehicle-related fees. The loan must be secured by a first lien on the purchased vehicle. Secondary liens, unsecured personal loans, or credit card financing do not qualify.

Key exclusions:

Lease payments do not qualify—clients who lease rather than purchase cannot claim QPVLI.
Related party loans under 267(b) or §707(b)(1) are excluded, meaning family financing arrangements won’t generate deductible interest.
Negative equity from trade-in vehicles, collision and liability insurance, and unrelated property such as trailers or boats are also excluded from the SPVL calculation.

Refinancing:

If a qualifying vehicle loan is later refinanced, interest on the refinanced amount generally remains eligible—but only to the extent the new loan does not exceed the outstanding balance of the original SPVL at the refinancing date. Any cash-out amount or additional indebtedness added during refinancing does not qualify, proportionally reducing deductible interest.

Limitations

The deduction is capped at $10,000 per Federal tax return regardless of filing status—joint filers do not receive a doubled limit. Additionally, the deduction phases out by $200 for each $1,000 (or portion thereof) by which modified adjusted gross income (MAGI) exceeds $100,000 ($200,000 for joint filers), reaching zero at $150,000 ($250,000 for joint filers). Taxpayers must report the vehicle’s VIN on their return to claim the deduction.

Planning Considerations

Verify final vehicle assembly in the U.S.: Use the NHTSA VIN Decoder or vehicle label to confirm final assembly in the U.S. before making a purchase.
Document personal use intent: Clients should review their loan documentation to verify first-lien status, ensure the retail installment sales contract indicates personal use, and maintain personal auto insurance on the vehicle. The IRS may evaluate deduction eligibility based on information in loan documentation and the type of insurance held on the vehicle.
Financing structure: Family loans and related-entity financing are excluded. When clients roll negative equity into new vehicle financing, that portion generates no QPVLI deduction—down payments offset negative equity first. Caution clients that cash-out refinancing reduces the qualifying loan amount.
Lease vs. purchase: Factor the QPVLI deduction into lease-versus-buy decisions for clients. Leasing forfeits this tax benefit entirely, which may affect the overall cost comparison.
Mixed-use planning: If a vehicle is used partially for business, taxpayers may choose to deduct interest as QPVLI or as business interest—but not both for the same dollars.
Watch the MAGI phaseout: For clients approaching $100,000 MAGI ($200,000 joint), model the phaseout impact before purchase decisions.
Proof of interest paid: Lenders receiving $600 or more in annual interest on a qualified vehicle loan must furnish a written statement to the borrower by January 31 of the following year showing the interest received. Clients should retain this statement to substantiate their deduction.

These proposed regulations are not final and are therefore subject to change, so stay tuned for more updates from the Treasury and IRS. February 2, 2026 is the cut-off date for public comments on the proposed regulations, with a public hearing scheduled for February 24, 2026.

For more, be sure to refer to the proposed regulations for “No Tax on Car Loan Interest”.