Can You Write Off Interest on a Car Loan?

While interest paid on personal car loans is generally not tax-deductible, specific situations allow for deductions. However, the tax system typically separates personal expenses from those incurred to generate income.

Understanding Interest Deductibility

The U.S. tax system generally disallows deductions for interest paid on personal loans. This principle means personal expenses, like car loans for personal transportation, are not directly related to earning income and therefore do not reduce taxable income.

Other types of interest are deductible when tied to income-producing activities. Examples include qualified home mortgage interest, student loan interest (up to limits), and investment interest (capped by net investment income). Interest incurred for business purposes is also deductible. These distinctions explain why personal car loan interest is generally not eligible for a tax deduction.

When Car Loan Interest Becomes Deductible

Car loan interest becomes deductible when the vehicle is used for income-generating activities, not purely personal use. The deduction depends on the percentage of the vehicle’s use directly attributable to these activities. If a vehicle serves both personal and qualified purposes, only the interest portion corresponding to the qualified use is deductible.

A common scenario involves using a vehicle for a trade or business. Self-employed individuals, such as sole proprietors or independent contractors, may deduct car loan interest if the vehicle is considered “ordinary and necessary” for their business operations. This means the expense is common, accepted in their industry, and helpful for their business. For example, a freelance photographer transporting equipment to job sites could deduct a portion of the interest. Note that, following the Tax Cuts and Jobs Act (TCJA), most unreimbursed employee business expenses, including car expenses, are no longer deductible for employees.

Interest may also be deductible if the vehicle is used for rental property activities. If a vehicle is regularly used for tasks related to operating a rental property, such as transporting tools or showing properties, a portion of the interest is deductible. This applies to vehicles used to manage and maintain rental real estate, reported on Schedule E.

Less commonly, interest is deductible if the car generates investment income. This applies if the vehicle is used directly in an activity to produce taxable investment income. For example, using a vehicle to travel to investment properties for management purposes could make the interest an investment expense. The deduction for investment interest is limited to the amount of net taxable investment income.

A new temporary deduction for personal use car loan interest, introduced by the “One Big Beautiful Bill Act,” is effective from 2025 through 2028. This allows individuals to deduct up to $10,000 annually in interest paid on a loan for a qualified personal use vehicle. To qualify, the loan must originate after December 31, 2024, the vehicle must be new, and its final assembly must occur in the United States. This deduction phases out for taxpayers with modified adjusted gross income exceeding $100,000 for individuals or $200,000 for joint filers.

Calculating and Claiming the Deduction

Once car loan interest is deductible, calculate the amount and report it on tax forms. Determine the percentage of the vehicle’s use for business, rental, or investment activities. This percentage applies to the total interest paid. For example, if a vehicle is used 75% for business, only 75% of the car loan interest is deductible.

To determine the business, rental, or investment use percentage, a mileage log is essential. This log should record total miles driven for the qualified activity and total miles driven for all purposes during the tax year. The business use percentage is calculated by dividing business miles by total miles.

Taxpayers have two methods for deducting vehicle expenses: the standard mileage rate or the actual expense method. The standard mileage rate, set annually by the IRS, covers vehicle costs, including an allowance for interest. For 2025, the business use rate is 70 cents per mile. If this method is chosen, a separate deduction for car loan interest is not allowed as it is already factored into the rate.

Under the actual expense method, taxpayers itemize all vehicle-related costs, including gas, oil, repairs, insurance, registration fees, and car loan interest. The calculated business-use percentage is applied to the total of these actual expenses to arrive at the deductible amount. This method often requires more detailed record-keeping but may yield a larger deduction if actual expenses, particularly depreciation and interest, are substantial. For self-employed individuals, these deductions are typically reported on Schedule C, Profit or Loss From Business. For rental property income and expenses, including vehicle use, the appropriate form is generally Schedule E, Supplemental Income and Loss.

Maintaining Proper Records

Proper record-keeping is essential for substantiating any car loan interest or vehicle-related tax deduction during an IRS inquiry or audit. Without adequate records, the deduction may be disallowed. The IRS requires timely records, meaning they should be recorded at or near the time of the expense or trip.

Essential documents include loan statements detailing annual interest paid. For vehicle use, a mileage log is necessary. This log should include the date, starting and ending locations, trip purpose, and total miles driven for each business, rental, or investment activity. It is also important to record odometer readings at the beginning and end of the year.

Beyond mileage logs and loan statements, retain receipts for all vehicle expenses, such as fuel, maintenance, repairs, insurance premiums, and registration fees. These records support claimed deductions and demonstrate the ordinary and necessary nature of expenses for the qualified activity. Keeping these documents organized, physically or digitally, ensures they are available for tax preparation or IRS review.