Final Rules on Auto Loan Interest Deduction

The U.S. Department of the Treasury and the IRS finalized regulations under Sections 163(h)(4) and 6050AA governing the temporary deduction for qualified passenger vehicle loan interest (QPVLI) and related information reporting. The final regulations largely retain the January 2026 proposed regulation framework, but they make several important revisions. For the Section 163(h)(4) interest deduction, the regulations apply to taxable years beginning after Dec. 31, 2024, and before Jan. 1, 2029, and generally to indebtedness incurred after Dec. 31, 2024. For the Section 6050AA information reporting requirements, the regulations apply to calendar years beginning after Dec. 31, 2024, and before Jan. 1, 2029. However, as clarified in the preamble to the final regulations, transition relief under Notice 2025-57 continues to apply to reporting obligations for reportable interest received in 2025.

Background

The One Big Beautiful Bill Act added Section 163(h)(4), which permits a deduction for QPVLI as an exception to the general disallowance of a deduction for personal interest, and amended Section 63(b) so the deduction is available regardless of whether a taxpayer chooses to itemize their deductions. QPVLI generally is interest on debt incurred to purchase an applicable passenger vehicle (APV) for personal use, secured by a first lien. A vehicle qualifies as an APV if it meets several requirements, including the following:

• Its original use commenced with the taxpayer.
• Its final assembly occurred in the U.S.
• It is a type of qualifying vehicle.
• Its gross vehicle weight rating (GVWR) is below 14,000 pounds.

The deduction is limited to $10,000 per return regardless of filing status and is subject to a phase out as modified adjusted gross income exceeds $100,000, or $200,000 for joint filers.

Under Section 6050AA, certain trade or business recipients of at least $600 of interest on a specified passenger vehicle loan (SPVL) are required to file Form 1098-VLI, “Vehicle Loan Interest Statement,” and furnish a payee statement.

Key changes from the proposed regulations

In response to comments, the final regulations made several clarifications to the proposed regulations under Section 163(h)(4), including:

• First-lien requirement. The final regulations clarify that the “first lien” is the first voluntary security interest recorded against the vehicle. Later involuntary liens, such as tax or similar liens that receive temporary priority, are disregarded. The final regulations also clarify that a lien is not disqualified if perfection or recording of the lien is delayed because of normal processing or if the lien is released after repossession or a total-loss insurance payment provided the borrower remains liable for the SPVL.
• Vehicle classifications. Treasury removed previously incorporated Environmental Protection Agency definitions that could have imposed lower weight limits on SUVs, pickup trucks, and motorcycles that conflict with the statutory 14,000-pound GVWR ceiling.
• Amounts treated as QPVLI. The final regulations clarify that QPVLI includes points and deferred or capitalized interest. Additionally, origination and financing charges, prepayment penalties, late-payment charges, default-related charges, and similar fees can qualify if they are treated as interest for federal income tax purposes and reported as interest under Section 6050AA.
• Financed ancillary items. The final regulations provide a nonexhaustive list of financed amounts included in an SPVL: vehicle repair plans; mechanical repair coverage; tire, wheel, paint, and interior protection products; key-fob replacement plans; guaranteed asset protection waivers or insurance; certain credit insurance products; title and registration fees; and vehicle-related accessories that are components of the APV. Additionally, the final regulations clarify that whether an item is customarily financed and directly related to the APV purchase is determined on an industrywide basis, rather than by one lender’s financing practices.
• Original-use and dealer vehicles. Retreating from the position in the proposed regulations, original use does not commence with a dealer merely because the dealer titles or registers a vehicle if the vehicle continues to be held primarily for sale to customers in the ordinary course of business. Thus, a demonstrator vehicle used for customer test drives can remain eligible for original-use treatment by a future buyer. In contrast, original use generally begins with a dealer for a vehicle held for other purposes, such as a service or customer-loaner vehicle. If more than one person jointly purchases a vehicle, original use commences with each purchaser when one joint purchaser takes delivery.
• Refinancings. Accrued but unpaid interest included in a refinancing can be part of the new SPVL provided that the other SPVL requirements are met. A new borrower added in the refinancing generally does not obtain SPVL treatment merely by joining the loan, but the loan can remain an SPVL for the original obligor.
• Personal use. Whether the vehicle is for personal use is determined when the debt is incurred. A later change in actual use does not cause the taxpayer to fail the personal-use test.
• Information reporting. Treasury and the IRS generally did not adopt comments requesting an extension of the effective date or changes to the reporting requirements in the proposed regulations (such as allowing interest recipients to report all auto interest without identifying it as interest paid on an SPVL or waiving reporting of some information such as the VIN). One clarification the final regulations did make is to allow interest recipients to rely on contracts or other relevant information to establish whether the vehicle is for personal use.

Crowe observation

Treasury and the IRS acknowledge in the preamble to the proposed regulations that interest recipients will need to collect information they currently might not have in order to comply with the statutory reporting requirements.

Looking ahead

The final regulations make few changes to the proposed regulations. The changes that are made mostly clarify the rules around eligibility for the deduction. The reporting rules stay largely the same as the proposed regulations, with no additional relief for 2026. The fact that transition relief is available only for 2025 means that interest recipients that have not yet incorporated these new rules into their documentation and procedures will need to work quickly to comply with these rules.