Proposed regulations clarify the eligibility requirements for the new IRC §163(h)(4) deduction for interest paid on qualified passenger loan vehicles purchased for personal use that is available for the 2025 through 2028 tax years. (REG-113515-25) The deduction is capped at $10,000 annually and is subject to phaseout for taxpayers with modified AGI above $150,000 ($250,000 MFJ). One of the requirements for the deduction is that the original use of the vehicle must commence with the taxpayer.
Highlights of the proposed regulations clarify that:
- Only an individual, decedent’s estate, nongrantor trust, or disregarded entity (e.g., nongrantor trust or SMLLC) owned by one of these taxpayers can claim the deduction (assuming the other requirements are met);
- The personal use requirement is met if at the time of purchase the taxpayer estimates that the vehicle will be used more than 50% of the time for personal use. Taxpayers do not have to reevaluate the personal use requirement in subsequent years. For disregarded entities the determination is made at the owner level, and for estates and trusts this is determined based on the expected use by the heirs or beneficiaries;
- A taxpayer that uses a vehicle partially for business use can choose to deduct the interest as a business expense, but must reduce the auto loan interest deduction claimed on Schedule 1-A by the amount of business interest claimed;
- The $10,000 limit applies per return, so MFJ filers are limited to a $10,000 deduction, while taxpayers who file MFS would be entitled to up to $10,000 per spouse;
- Interest attributable to amounts directly related to the purchase of the vehicle (e.g., vehicle service plans, extended warranties, sales taxes, and vehicle-related fees) qualifies for the deduction; and
- Although interest paid on refinanced loans qualifies for the deduction, the deduction is limited to interest paid on the outstanding balance of the refinanced loan as of the date of the refinancing.
The proposed regulations also outline the reporting requirements for lenders, but lenders were given transitional relief for the 2025 tax year. (IRS Notice 2025-57) See our October 21, 2025, Flash E-mail for details.
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