IRS Guidance Outlines Eligibility For New Auto Loan Interest Tax Break   

The Internal Revenue Service has released proposed regulations clarifying how a new auto loan interest deduction will work, offering dealerships and consumers detailed guidance on which vehicles qualify and under what circumstances buyers can claim the tax break. In a Dec. 31 statement, the IRS explained that the new guidance addresses important eligibility criteria in order to help taxpayers take advantage of this new tax benefit.

The deduction was created by H.R. 1, formally known as the “One Big Beautiful Bill Act,” which was signed into law in July 2025. The legislation allows borrowers to deduct up to $10,000 a year in interest paid on loans for new vehicles used for personal purposes, provided the vehicle’s final assembly occurred in the United States. The deduction phases down for taxpayers earning more than $100,000 annually, or $200,000 for joint filers. Unlike many tax benefits, the deduction is available even to taxpayers who take the standard deduction rather than itemizing, and it applies to the 2025 through 2028 tax years.

While the law itself applies only to new vehicles whose “original use” begins with the taxpayer, the IRS’ draft regulations, released Jan. 2, outline scenarios in which some vehicles that are not factory-fresh could still qualify. The proposed rules are open for public comment through Feb. 2 on regulations.gov.

As reported by Automotive News, last year the National Independent Automobile Dealers Association had urged lawmakers to extend the deduction to used vehicles but was unsuccessful. Still, the IRS proposal suggests that certain demo vehicles and some customer returns may be treated as new for purposes of the deduction, depending on how they are handled before resale.

Under the proposed rules, “original use” is defined as the first person who takes delivery of a vehicle after it is sold, registered, or titled. The draft language specifies that original use does not begin with a dealer unless the dealer registers or titles the vehicle.

For demonstration vehicles, eligibility hinges largely on state law. If a state requires a dealership to register and title a demo vehicle before selling it, the customer who later buys that vehicle would not be eligible to deduct the interest. In states that do not require demos to be titled or registered by the dealer, however, original use may begin with the retail buyer, allowing the deduction.

The IRS also addressed vehicles returned shortly after purchase. Under the proposal, if a customer returns a new vehicle within 30 days of delivery, the next buyer could still claim the deduction.

“The Treasury Department and the IRS understand that dealers may have return policies that range from several days up to 30 days, and these proposed rules are intended to reflect industry practice,” the agency wrote in its accompanying explanation.

Leases, however, are excluded. Although leases involve financing, the law does not allow lease payments to qualify for the deduction. Buyers who later purchase their leased vehicle with a loan would also be ineligible. Under the draft rules, if the leasing company titled and registered the vehicle, the lessor is considered to have had original use.

Loaner vehicles are not addressed in a standalone example, but the IRS said in its discussion that they would generally be treated the same as demo vehicles. If state law requires the dealer to register or title a loaner used as a courtesy car, original use would begin with the dealer, disqualifying it from the deduction.

The proposed regulations also explain how taxpayers and dealerships can confirm whether a vehicle meets the law’s U.S. final assembly requirement. The IRS said buyers may rely on the plant of manufacture indicated by the vehicle identification number or the final assembly point listed on the federally required parts country-of-origin label. Taxpayers may also use the National Highway Traffic Safety Administration’s online VIN decoder.

In addition, the IRS clarified how the “personal use” requirement applies. The law does not allow deductions for fleet or primarily commercial vehicles, but the draft rules state that as long as the taxpayer, a spouse, or eligible relatives use the vehicle more than 50 percent of the time, the interest may be deducted.

Examples in the proposed regulations show that a taxpayer purchasing a vehicle for a child’s use could qualify, as could a buyer who uses the vehicle for ride-sharing up to 15 percent of the time.