Can Car Loan Interest Be Deducted on Taxes?

Tax deductions for interest payments can offer significant financial relief, allowing taxpayers to reduce their taxable income. However, not all interest paid is deductible, and the rules governing these deductions can be complex, varying based on the loan’s purpose and how the borrowed funds are used. While interest on certain types of loans, like those for a business or a home mortgage, may qualify for a deduction, interest paid on a car loan for personal use generally does not. Understanding these distinctions is important for navigating tax obligations effectively.

Personal Vehicle Loan Interest

Interest paid on a loan used to purchase a car for personal use is not tax-deductible. The Internal Revenue Service (IRS) categorizes this type of interest as “personal interest,” which is non-deductible. This rule applies regardless of whether the vehicle is new or used, or how the loan is structured, as long as its primary purpose is personal transportation. For example, the interest paid on a loan for a family sedan used for commuting and errands would not qualify for a tax deduction.

This non-deductibility stems from the nature of the expense; personal consumption items, including vehicles used for daily life, do not generate tax-deductible interest. Unlike interest on a home mortgage or a business loan, which are tied to assets that can appreciate or generate income, personal car loans are considered an expense of personal living.

However, a new provision under the One Big Beautiful Bill Act, effective for 2025 through 2028, introduces a temporary deduction for interest paid on loans used to purchase a qualified vehicle for personal use. This deduction is limited to $10,000 annually and phases out for higher-income taxpayers. To qualify, the loan must originate after December 31, 2024, be used to purchase a new vehicle (used vehicles do not qualify), and the vehicle must have undergone final assembly in the United States and be secured by a lien on the vehicle.

Business Vehicle Loan Interest

Interest paid on a car loan can be deductible if the vehicle is used for business purposes. This applies to self-employed individuals, independent contractors, or business owners who use a vehicle for activities such as client visits, transporting tools, or making deliveries. Only the portion of the interest corresponding to the percentage of business use is deductible. For instance, if a vehicle is used 70% for business and 30% for personal travel, only 70% of the loan interest is deductible.

This deduction falls under business expenses and is claimed on Schedule C (Form 1040), Profit or Loss from Business, for sole proprietors and single-member LLCs. Other forms, such as Schedule E for partners, may be used depending on the business structure. Accurate record-keeping of business mileage and expenses is needed to substantiate the deduction. If the vehicle is used solely for business, the full amount of interest can be written off.

Business vehicle expenses, including loan interest, can be calculated using either the standard mileage rate or the actual expense method. If choosing the actual expense method, which includes interest, fuel, repairs, and insurance, documentation of all related costs is required. The standard mileage rate, while simpler, does not include car loan interest, allowing it to be deducted separately if applicable.

Interest on Loans Secured by Your Home

Using a home equity loan or a home equity line of credit (HELOC) to purchase a vehicle can lead to confusion regarding interest deductibility. While the loan is secured by your home, the interest is only deductible if the borrowed funds are used to “buy, build, or substantially improve” the home that secures the loan. If the proceeds from a home equity loan are used for other purposes, such as buying a car, the interest is not tax-deductible.

The Tax Cuts and Jobs Act of 2017 limits the deductibility of home equity interest through 2025. The deduction applies to qualified residence interest, which includes interest on acquisition indebtedness for buying, building, or substantially improving a home. The total mortgage debt, including a primary mortgage and any home equity loans, is subject to a limit of $750,000 ($375,000 if married filing separately) for loans taken out after December 15, 2017. Securing a car loan with your home does not automatically make the interest deductible; the funds must meet the criteria for qualified home indebtedness.

Required Information for Deductible Interest

To claim a deduction for car loan interest, or related home loan interest, taxpayers must maintain accurate records. This documentation is needed to substantiate the deduction in the event of an IRS inquiry. Loan statements clearly showing the amount of interest paid during the tax year are required.

For business use of a vehicle, a mileage log is required, recording the date, destination, purpose, and total miles driven for each business trip. Also record the odometer readings at the beginning and end of the tax year to calculate total mileage. Receipts for other car-related business expenses, such as fuel, maintenance, and repairs, should also be kept. For home equity loans, documentation proving the funds were used for qualified home improvement is required, such as invoices or contracts for construction or renovation work.