Car Loan Interest Deduction 2025: What T.D. 10054 Settles for Preparers

T.D. 10054 is the final regulation package behind the car loan interest deduction 2025 returns can claim, and it settles several questions the statute left open. It was published in the Federal Register on September 8, 2026 (91 FR 57214). It adds Treas. Reg. Section 1.163-16 for the deduction and Treas. Reg. Section 1.6050AA-1 for lender reporting. It matters most for preparers with clients whose 2025 returns are on extension.

The regulations take effect November 9, 2026, but the applicability paragraph reaches taxable years beginning after December 31, 2024. I covered the statute in the August post on Section 163(h)(4) and will not repeat it. This post covers four rules the final regulations add: personal use, qualifying debt, original use after a lease, and lender statements. Each changes what I ask at intake.

Key Takeaways: Car Loan Interest Deduction 2025 and T.D. 10054

• The final regulations are effective November 9, 2026. Treas. Reg. Section 1.163-16(i) applies to taxable years beginning after December 31, 2024, and before January 1, 2029.
• Personal use is tested once, when the debt is incurred: more than 50 percent expected personal use over the expected ownership period.
• A client with some business use may deduct the overlap as car loan interest or business interest, and the choice matters above the $10,000 cap.
• Negative equity, cash proceeds and non-vehicle items are not qualifying debt, and interest is allocated pro rata.
• A lease buyout loan generally fails the original use test, and so does a loan that does not treat the vehicle as new.
• For 2025, lenders may satisfy their reporting duty with a statement under Notice 2025-57. The final regulations add no further relief.

Do the Final Regulations Apply to Car Loan Interest Deduction 2025 Claims?

Yes, the final regulations reach 2025, because Treas. Reg. Section 1.163-16(i) says the section "applies to taxable years beginning after December 31, 2024, and before January 1, 2029." The text of T.D. 10054 as printed in Internal Revenue Bulletin 2026-39 gives two separate dates. The first is "The final regulations are effective on November 9, 2026." For applicability, the DATES block points to Section 1.163-16(i) and Section 1.6050AA-1(i). The lender reporting rule has the same shape and applies to "calendar years beginning after December 31, 2024, and before January 1, 2029."

The effective date says when the regulation takes effect, and the applicability date names the years it covers. A 2025 return falls inside the covered years whether you file it before or after November 9.

How Does the Personal Use Test Work When a Client Also Drives for Business?

A vehicle passes the personal use test if, when the debt is incurred, the taxpayer expects it to be used personally by the taxpayer, a spouse, or a relative described in Section 152(c)(2) or (d)(2) for more than 50 percent of the time. Treas. Reg. Section 1.163-16(f)(1) adds that the determination "is based on the expected use during the period the taxpayer expects to own the APV." APV is the regulation's term for an applicable passenger vehicle.

The preamble calls it "not an ongoing requirement," and says "differences between expected use at the time the indebtedness is incurred and later actual use of the vehicle do not affect the personal use determination." A client who expects 85 percent personal use and 15 percent rideshare driving passes the test. A sole proprietor who expects to use the vehicle in a contracting business 60 percent of the time does not. I write the expected split into the file at purchase, because the test looks at that expectation and not at a later mileage log.

A client who passes the test but has business use does not have to allocate. The preamble says such taxpayers "are not required to allocate interest between QPVLI and business interest, but may choose to do so." QPVLI is qualified passenger vehicle loan interest. Under Section 1.163-16(g)(2), the overlapping interest can go either way, and the QPVLI amount "is reduced to the extent that the taxpayer deducts that independently deductible interest as non-QPVLI."

Example 3 in paragraph (g)(4) shows why the choice matters. In the example, A pays $15,000 of interest and 20 percent of the vehicle's use is business. The example concludes that A "may deduct $3,000 of interest as business interest and deduct $10,000 as QPVLI." That is $13,000 deducted, against $10,000 if all of it went through the cap. It assumes MAGI under $100,000 and that the business interest is fully deductible. Choosing the business-interest route requires reporting "in the manner prescribed by the Internal Revenue Service" under paragraph (g)(3).

How Much of a Car Loan Counts as Qualifying Debt?

Only the part of the loan used to buy the vehicle, plus items customarily financed with it, counts as a specified passenger vehicle loan, or SPVL. Treas. Reg. Section 1.163-16(d)(2)(i) keeps in "warranties or extended warranties," GAP waiver or insurance, and "sales taxes, vehicle-related fees (including title and registration fees)." Paragraph (d)(2)(ii) takes out "indebtedness incurred for the repayment of negative equity on a loan secured by a trade-in vehicle," along with property such as a trailer or boat, and debt that "relates to cash proceeds that the taxpayer receives from the lender."

Under paragraph (d)(2)(iii)(B), a down payment is applied first against negative equity and the other non-qualifying amounts. Example 4 in paragraph (d)(6) has a $40,000 vehicle, $6,000 of negative equity and a $4,000 down payment. The debt is $42,000, of which $40,000 is an SPVL and $2,000 is not. By the same rule, a $6,000 down payment would leave the whole $40,000 loan qualifying.

Interest on a mixed loan is split by share. Example 5 in the same paragraph treats a $40,000 loan with $36,000 of qualifying amounts as 90 percent SPVL, so "only 90 percent of each interest payment on the loan may be QPVLI." The preamble says the final regulations "require the use of the pro rata allocation method and do not provide for any other allocation method."

The preamble adds two refinancing points. Unpaid interest rolled into the new loan "may qualify as an SPVL" if the other requirements are met. And when a new borrower is added at refinancing, the loan "continues to be an SPVL with respect to the original obligor(s), but is not an SPVL with respect to the new obligor(s)." A co-borrower added at refinancing has no qualifying debt of their own on that loan. The August post covers the cash-out cap on a refinance.

Does a Lease Buyout Loan Qualify for the Deduction?

A lease buyout loan generally does not qualify, because original use of a leased vehicle commonly begins with the lessor and not with the lessee who later buys it. The preamble says "It is common for original use of a leased vehicle to commence with the lessor, in which case original use would not commence with a lessee that purchases the vehicle." Example 3 in Section 1.163-16(e)(2)(v)(C) applies this to a lessee who exercises a purchase option at the end of the lease. The leasing company took delivery first, so for the lessee, A, "the original use of the vehicle does not commence with A."

The August post framed original use as the statutory test, and it is. The regulation adds a second gate for people who borrow. Section 1.163-16(e)(2)(i) says that in the case of "a purchaser that incurs indebtedness for the vehicle purchase, original use of the vehicle does not commence with that purchaser unless the loan documentation treats the vehicle as a new vehicle." The preamble says that refers to "the lender's classification of the vehicle for purposes of its financing programs." The client must be the first to take delivery, and the lender must classify the vehicle as new in its financing programs.

Dealers add two edge cases. Original use does not start with a dealer for a demonstrator held primarily for sale, so it can still start with a later buyer. A buyer who returns the vehicle within 30 days is not treated as the first to take delivery.

What Will the Lender Send for a 2025 Return?

For 2025 interest, a lender can meet its reporting duty with a statement and not a Form 1098-VLI. Notice 2025-57 lets a recipient satisfy Section 6050AA by "making a statement available to the individual on or before January 31, 2026, indicating the total amount of interest received in calendar year 2025 on a specified passenger vehicle loan." That statement can come through "an online account portal," "a regular monthly statement," or "an annual statement." The notice also says it "does not affect or delay the applicability of section 163(h)(4)."

Commenters asked Treasury to extend the relief, and the preamble declines: "the Treasury Department and the IRS are not including additional transitional guidance or phased implementation in the final regulations." Because the notice asks only for total interest, the VIN and origination date may have to come from the loan contract.

The $600 threshold is per loan. Under Section 1.6050AA-1(f)(1), a recipient "need not report interest of less than $600 received on an SPVL, even though it receives a total of $600 or more of interest on all of the SPVLs of the payor of record." A household with two small loans at one lender can receive no statement for either. Under Section 1.163-16(c)(2)(i), origination charges, late charges and similar fees count as QPVLI only if each is "characterized as interest expense for Federal income tax purposes and included in the amount reported as interest received for the calendar year in the statement furnished by the interest recipient." If a 2025 portal total leaves fees out, the regulation text points to leaving them out of the deduction too, though it does not address a notice statement directly.

Before You Finish a 2025 File

When was the debt incurred, and what did it finance? What personal use did the client expect at purchase? Does the loan documentation treat the vehicle as new, and did the client take first delivery? Where did the interest total come from, and does it match the contract? The cap, the phaseout and the VIN condition are in the August post.

When a client's facts fall between two of the regulation's examples, I open Tax Orator and read the paragraph next to the preamble discussion of it.