In final regulations (TD 10054), the IRS and Treasury implement the deduction for qualified passenger vehicle loan interest (QPVLI) and the related lender information reporting obligations under IRC Sections 163(h)(4) and 6050AA. The final regulations largely retain the framework outlined in proposed regulations from January 2026 (see Tax Alert 2026-0141), while providing several taxpayer- and lender-friendly clarifications concerning lien priority, vehicle classifications, financing-related charges and customarily financed items.

The IRS also released an updated draft Form 1098-VLI and instructions.

Overview

The final regulations generally allow eligible taxpayers to deduct up to $10,000 of QPVLI. The deduction applies to interest on qualifying vehicle loans incurred after December 31, 2024, and only for tax years beginning after December 31, 2024, and before January 1, 2029. Lenders and other interest recipients that receive $600 or more of qualifying interest from an individual during a calendar year must report that information to the IRS and furnish a payee statement to the borrower.

To be deductible, the interest must be paid on a loan that is (1) incurred after December 31, 2024, (2) used to purchase a qualifying vehicle for the taxpayer's personal use and (3) secured by a first lien on that vehicle.

The final regulations confirm that taxpayers generally cannot deduct interest on loans originating before 2025, even if interest is paid during 2025–2028. They also clarify that taxpayers that use a credit card to purchase a vehicle cannot deduct the interest on that credit card.

Key QPVLI requirements

For interest to be deductible, the loan must be for an applicable passenger vehicle (APV), which is defined as a vehicle that:

• Is new to the taxpayer, meaning its original use begins with the taxpayer
• Is manufactured primarily for use on public streets, roads, and highways
• Has at least two wheels
• Is a car, minivan, van, sport utility vehicle, pickup truck or motorcycle
• Is treated as a motor vehicle under Title II of the Clean Air Act
• Has a gross vehicle weight rating of less than 14,000 pounds
• Is finally assembled in the United States

EY observes: The final regulations broaden several vehicle classifications (particularly SUVs, pickup trucks and motorcycles) to avoid unintended exclusions that could have resulted from the more restrictive cross-references in the proposed regulations and not in the statute. The revisions in the final regulations reduce the risk of excluding interest on loans for otherwise eligible SUVs, pickup trucks and motorcycles.

The Preamble to the final regulations confirms that the definition may also encompass certain recreational vehicles (RVs), particularly smaller RVs commonly described as vans, if they satisfy all other statutory requirements. The final regulations permit reference to the vehicle-classification definitions in 40 CFR 600.002, under which a van generally includes a light truck with an integral enclosure fully enclosing both the driver and load-carrying compartments.

Financial institutions should also consider whether an RV loan is already subject to Form 1098 mortgage-interest reporting when the vehicle constitutes a qualified residence and secures the loan, because the new vehicle-loan reporting rules may create overlapping classification and reporting considerations.

Amounts treated as qualified interest

The final regulations clarify that QPVLI includes:

• Regular stated interest
• Points (prepaid interest)
• Capitalized or deferred interest
• Certain origination-related financing charges
• Pre-payment penalties
• Late payment charges and default-related charges, if treated as interest for federal tax purposes

EY observes: This is one of the more significant expansions from the proposed regulations because industry comments requested certainty about these common fee categories.

Negative equity

Negative equity arises when the outstanding balance on a taxpayer's existing vehicle loan exceeds the vehicle's trade-in or market value. For example, if a borrower owes $20,000 on a vehicle worth $16,000, the borrower has $4,000 of negative equity. That difference may be rolled into the financing for a replacement vehicle that qualifies as an APV. This was one of the most important issues for auto lenders, which requested the inclusion of negative equity in the specified passenger vehicle loan (SPVL) given the difficulty of identifying negative equity in internal lending systems. Treasury, however, rejected requests to include negative equity in the final regulations due to the constraints of the statute.

Under the final regulations:

• Debt attributable to negative equity on a trade-in vehicle is not indebtedness incurred to purchase the new vehicle
• Interest attributable to that portion of the financing is not deductible

To remove the portion of the interest related to negative equity, the final regulations allow the loan to be allocated between qualifying and non-qualifying portions, with interest allocated pro rata.

The final regulations also allow any down payment or other consideration provided by the taxpayer at closing to be applied first to negative equity and other nonqualifying amounts before it reduces the portion of the indebtedness attributable to the APV and directly related, customarily financed items.

Other items customarily financed

The proposed regulations allowed other items or amounts customarily financed with the purchase of an APV to be included within the SPVL. The final regulations expanded the list of examples of "customarily financed" items that may be included in the qualifying loan balance.

Industry commenters requested all amounts financed in a vehicle loan to be treated as qualifying indebtedness to avoid complex allocation calculations. Treasury instead interpreted the statute to require allocation so that only interest attributable to amounts borrowed for the purchase of the qualifying vehicle is deductible. The final regulations therefore retain the pro-rata allocation rules but expand the list to include:

• Extended warranties
• Vehicle service plans
• Mechanical repair coverage
• GAP coverage
• Vehicle protection products
• Certain credit-related insurance products
• Title and registration fees
• Vehicle accessories that are components of the vehicle

The final regulations also specifically exclude amounts not incurred to purchase the APV, including (1) negative equity on a trade-in vehicle (discussed previously), (2) non-credit collision and liability insurance, (3) unrelated property or services such as a trailer or boat, and (4) cash proceeds provided to the taxpayer. To remove the portion of the interest related to these excluded items, the final regulations allow the loan to be allocated between qualifying and non-qualifying portions, with interest allocated pro rata.

Refinancings

A refinanced loan can continue to qualify for the deduction if:

• The original loan was a specified passenger vehicle loan
• The refinancing remains secured by the vehicle
• The refinanced balance does not exceed the balance of the original qualifying loan

The final regulations generally do not permit additional amounts added during refinancing to become qualifying debt merely because they relate to the vehicle.

When a new borrower is added in connection with a refinancing, the final regulations clarify that the refinanced indebtedness remains an SPVL for the original obligor or obligors but does not qualify as an SPVL for the newly added obligor. In addition, the portion of the new loan attributable to accrued but unpaid interest on the refinanced SPVL may qualify as an SPVL if all other applicable requirements are satisfied.

Dealer vehicles

The proposed regulations generally treated original use as commencing with the first person that takes delivery of a vehicle after it is sold, registered or titled. If a sale was cancelled within 30 days, however, original use could commence with a subsequent purchaser if that purchaser's loan documentation treated the vehicle as new. The final regulations retain this framework but clarify its application to dealer inventory and dealer-use vehicles:

• A vehicle held primarily for sale to customers does not begin its original use with the dealer, so a later retail purchaser may still satisfy the original-use requirement.
• A vehicle used by the dealer for another business purpose — such as a customer loaner — may begin its original use with the dealer and therefore may not qualify as new when later sold.

The final regulations also continue to limit lease buyouts. If a leasing company registered or titled the vehicle during the lease, original use generally began with the leasing company, even though the taxpayer possessed the vehicle and later financed the buyout.

EY observes: The final regulations provide greater clarity regarding the treatment of test-drive and courtesy vehicles providing that a vehicle held primarily for sale in a dealer's inventory does not commence its original use. When the vehicle is financed by a consumer, the vehicle will qualify as a new car. The Preamble suggests serving as a customer loaner vehicle may commence original use, but the regulations are more broad, providing that a dealer vehicle can qualify as a APV as long as the vehicle is held "primarily for sale to customers."

State registration and titling rules remain relevant and may affect when original use is considered to begin.

Form 1098-VLI: Information reporting requirements for lenders

Persons that are engaged in a trade or business and receive $600 or more of interest on an SPVL from an individual must file an information return and furnish a borrower statement.

Reported information includes:

• Borrower name and address
• Interest paid during the year
• Outstanding principal balance
• Loan origination date
• Vehicle year, make, model and VIN
• Any additional information prescribed by the IRS

The final regulations require a separate information return for each SPVL rather than a single consolidated return. In addition to borrower and interest-recipient identifying information, the return must report the annual interest received, beginning-of-year outstanding principal, loan-origination date, vehicle year, make, model and VIN, and the date the interest recipient acquired the loan, as applicable. Treasury and the IRS did not provide relief from VIN reporting because the VIN is statutorily required and supports verification of other reportable vehicle information.

When an SPVL is sold or transferred during the year, each interest recipient reports its applicable period separately. The acquisition date helps the borrower identify the period covered by each return and consolidate the reported amounts for tax purposes; it does not require multiple interest recipients to file a consolidated return.

The new version of the draft Form 1098-VLI includes two new checkboxes: (1) whether original use commenced with the payor of record and (2) whether the assembly was in the United States. The instructions to the form largely remain the same with a few updates to match the definitions in the final regulations.

EY observes: For the substitute reporting permitted last year under Notice 2025-57, many lenders took the position that, for ease of meeting the reporting deadline, all vehicle loans could be reported. The new draft requires lenders to confirm that the original use and final assembly requirements were analyzed for purposes of determining that the interest was reportable.