Is Interest Paid on a Car Loan Tax Deductible?

Car loan interest is a common expense for many individuals, yet its deductibility for tax purposes is often misunderstood. For the majority of people, interest paid on a car loan for personal transportation generally does not qualify as a tax deduction. This contrasts with certain other types of interest that may offer tax benefits.

General Rules for Car Loan Interest

Interest paid on a car loan for a vehicle primarily used for personal purposes is not tax deductible. The Internal Revenue Service (IRS) classifies personal car loans as personal interest, which is not allowed as a deduction. This differs from interest on qualified education loans or home mortgages, which often have specific provisions for deductibility.

However, a temporary change allows for a personal use car loan interest deduction for tax years 2025 through 2028. Individuals may deduct interest on a loan used to purchase a new, qualified vehicle for personal use. The vehicle must have undergone final assembly in the United States and meet certain weight requirements. This deduction is limited to a maximum of $10,000 annually and phases out for taxpayers with modified adjusted gross income exceeding $100,000 for single filers or $200,000 for joint filers.

Business Use of a Vehicle

An exception to the general rule applies when a vehicle is used for business purposes. For self-employed individuals, such as sole proprietors or independent contractors, interest paid on a car loan can be a deductible business expense. The deduction is limited to the percentage of the vehicle’s use that is directly attributable to business activities.

Taxpayers have two methods to account for vehicle expenses when the vehicle is used for business: the standard mileage rate or the actual expense method. The standard mileage rate, set annually by the IRS (e.g., 70 cents per mile for 2025 business use), simplifies the deduction by covering costs like depreciation, maintenance, and fuel. If this method is chosen, car loan interest cannot be deducted separately as it is factored into the rate.

The actual expense method allows for the deduction of specific costs incurred for business use. Under this method, expenses such as gasoline, oil, repairs, insurance, garage rent, and depreciation are tracked and deducted. The business-use percentage determines the deductible portion of these expenses, including car loan interest.

To determine the business-use percentage, taxpayers must keep detailed records of all miles driven, distinguishing between business and personal trips. This involves maintaining a mileage log that records the date, destination, business purpose, and total miles for each business trip. Meticulous record-keeping is essential for substantiating the business-use portion of vehicle expenses, including allocable interest.

For most employees, unreimbursed business expenses are no longer deductible. Changes enacted by the Tax Cuts and Jobs Act of 2017 and subsequently made permanent by the One Big Beautiful Bill Act of 2025 suspended these miscellaneous itemized deductions for the majority of W-2 employees. This business-use deduction primarily benefits self-employed individuals.

Other Situations for Deduction

Beyond direct business use, other situations may allow for the deductibility of car loan interest. One scenario involves using a vehicle as collateral for a home equity loan or line of credit (HELOC). If the proceeds from such a loan are used to buy, build, or substantially improve the taxpayer’s main home or a second home, the interest paid may be deductible as qualified residence interest.

The deductibility of home equity loan interest depends on the use of the funds, not solely on the collateral securing the loan. For instance, if a home equity loan secured by a car is used for home improvements, the interest can be deductible, subject to certain loan amount limitations. Current rules allow interest on up to $750,000 of qualified home acquisition debt (or $375,000 for married individuals filing separately) incurred after December 15, 2017.

Another situation involves specialized vehicles that are inherently tools of a specific trade or business. For example, a vehicle used exclusively for farming operations or a taxi cab used in a taxi business might have its loan interest directly treated as a business expense. This differs from typical personal vehicles occasionally used for business errands.

Interest paid on a car loan can also be deductible if the vehicle is used to generate investment income. For example, if a vehicle is purchased with borrowed funds and then rented out as part of an investment activity, the interest could qualify as investment interest expense. This deduction is limited to the taxpayer’s net investment income for the year.

Calculating and Claiming the Deduction

Once a taxpayer determines that car loan interest is deductible, the next step involves calculating the amount and reporting it correctly on tax forms. For business use of a vehicle by a sole proprietor or independent contractor, the deductible interest is reported on Schedule C (Form 1040), Profit or Loss From Business. This involves calculating the business-use percentage and applying it to the total interest paid.

If the actual expense method is chosen for business vehicle expenses, the business portion of the loan interest is entered on the “Other Interest” line of Schedule C. For qualified residence interest from a home equity loan, the deductible interest is reported on Schedule A (Form 1040), Itemized Deductions. Taxpayers claiming investment interest expense must file Form 4952, Investment Interest Expense Deduction, and then report the allowable deduction on Schedule A.

Lenders provide Form 1098 for mortgage interest, but car loan lenders do not issue such forms for non-mortgage interest. Taxpayers must track the total interest paid on their car loan throughout the year using their monthly statements. Self-tracking is important for accurately determining the deductible amount, particularly for business or investment purposes where only a portion of the interest may qualify.

Required Documentation

Maintaining meticulous records is important for substantiating any claimed car loan interest deduction. Loan statements showing the total interest paid during the tax year are essential. These statements provide proof of the interest amounts and payment history.

For business use of a vehicle, detailed mileage logs are necessary. These logs should record the date, destination, purpose, and mileage for every business trip. Such records enable the accurate calculation of the business-use percentage, which is then applied to the total car loan interest and other vehicle expenses.

If the actual expense method is used for business vehicles, receipts for all related expenses, such as fuel, maintenance, and insurance, must be retained. For interest deductions related to a home equity loan, documentation proving that the loan proceeds were used for home acquisition or improvement, like invoices or contracts, is necessary. These records are important for supporting the deduction in case of an IRS inquiry.