The IRS has issued final regulations (T.D. 10054) for the qualified passenger vehicle loan interest deduction enacted by the One Big Beautiful Bill Act (OBBBA). The rules generally apply to debt incurred after December 31, 2024, and tax years beginning after December 31, 2024, and before January 1, 2029. Eligible taxpayers may deduct up to $10,000 of qualified passenger vehicle loan interest (QPVLI), subject to income phaseouts.

IRS Clarifies What Constitutes Deductible Interest

The IRS confirmed QPVLI includes more than stated interest on a vehicle loan.

Deductible interest may also include:

  • Points
  • Deferred interest
  • Capitalized interest
  • Certain origination and financing charges
  • Prepayment penalties
  • Late-payment charges
  • Default-related charges

However, these amounts qualify only if they are treated as interest for federal income tax purposes and are reported as interest under the new reporting regime.

The final regulations also allow certain costs customarily financed as part of the vehicle purchase, including:

  • Extended warranties
  • Vehicle service contracts
  • Mechanical repair coverage
  • GAP coverage
  • Credit insurance products
  • Vehicle protection products
  • Title and registration fees
  • Vehicle accessories installed as part of the purchase transaction

Negative Equity Remains Excluded

Under the final regulations, debt tied to negative equity — an outstanding trade-in loan balance that exceeds the trade-in vehicle’s value — is not treated as debt incurred to buy the new vehicle. Interest on that portion does not qualify.

Important Clarifications for Refinanced Loans

A refinanced vehicle loan may continue to qualify, but only up to the outstanding balance of the original qualifying loan. New amounts added during refinancing generally do not qualify.

The IRS also clarified that:

  • Adding a new borrower during refinancing generally does not allow the new borrower to claim the deduction.
  • The original borrower may continue to qualify.
  • Accrued but unpaid interest rolled into refinancing may remain eligible if other requirements are met.

First-Lien Requirements Receive Practical Relief

Qualifying vehicle loans must be secured by a first lien. The IRS clarified that a loan can still meet this requirement when:

  • Lien perfection is delayed due to administrative processing.
  • Temporary involuntary liens arise under state law.
  • A vehicle is repossessed but the borrower remains liable.
  • An insurance company pays a total-loss claim and the lien is subsequently released.

Broader Definitions of Eligible Vehicles

The final regulations broaden the definitions of:

  • Sport utility vehicles (SUVs)
  • Pickup trucks
  • Motorcycles

The changes better align with the statute’s 14,000-pound gross vehicle weight rating limit.

Personal Use Is Tested at Origination

The personal-use requirement is tested when the debt is incurred. If the taxpayer reasonably expects personal use to exceed 50% at purchase, later changes in actual use generally do not retroactively disqualify the deduction.

New Information Reporting Requirements Take Center Stage

Beginning with qualifying loans, lenders and other interest recipients receiving $600 or more of annual interest on a specified passenger vehicle loan generally must report the information on new Form 1098-VLI, Vehicle Loan Interest Statement.

Required information includes:

  • Borrower information
  • Interest received
  • Outstanding principal balance
  • Loan origination date
  • Vehicle year, make, and model
  • VIN
  • Additional information prescribed by the IRS

Penalties under Sections 6721 and 6722 may apply for failure to file required returns or furnish required statements.

Income Limitations Apply

The deduction is capped at $10,000 per return and phases out based on modified adjusted gross income (MAGI):

  • Married Filing Jointly: Phaseout begins at $200,000 of MAGI.
  • All Other Taxpayers: Phaseout begins at $100,000 of MAGI, including single filers, heads of household, married filing separately, estates, and qualifying trusts.

The deduction is reduced by $200 for every $1,000, or portion thereof, above the applicable threshold and is fully phased out at:

  • $250,000 for married taxpayers filing jointly
  • $150,000 for all other taxpayers

For the complete final regulations see T.D. 10054.

Contact a Pinion tax advisor to discuss how the final vehicle loan interest deduction rules may affect your tax planning and reporting.