IRS Final Rule on Auto Loan Interest Deduction Leaves Dealers and Lenders Frustrated

The long-awaited final rule on the federal tax deduction for auto loan interest has landed, and the groups that represent dealers and vehicle finance companies are far from pleased. Published on Sept. 8 by the IRS and the Treasury Department, the guidance puts real-world limits on a benefit that was heralded as a win for car buyers when it was folded into the One Big Beautiful Bill Act back in July 2025.

The core of the frustration centers on how the deduction treats negative equity. When a buyer trades in a vehicle that is worth less than the outstanding loan balance, the remaining amount is routinely rolled into the new financing contract, alongside optional add-ons such as service contracts. Industry data shows this is not a niche scenario: nearly 30% of new-vehicle deals in the second quarter of 2026 involved negative equity, with the average amount carried over sitting at $6,884, according to Edmunds. Trade groups including the American Financial Services Association and the National Automobile Dealers Association had formally asked regulators to let interest paid on that rolled-over portion qualify for the deduction. The IRS and Treasury declined, stating in the Federal Register that they would not adopt the request.

Philip Bohi, general counsel at AFSA, called the outcome disappointing and argued that the agencies should be widening access to the benefit rather than narrowing it. As it stands, the deduction applies only to interest on loans for new vehicles whose final assembly takes place in the United States. It is capped at $10,000 per year and phases down for single filers earning above $100,000 and joint filers above $200,000. NADA’s Greg Evans had noted in a February 2026 comment that for many shoppers, financing negative equity within the same contract is the only way a purchase happens at all — a point regulators ultimately set aside.

The rule also creates a fresh administrative burden for lenders. Separating out how much of a borrower’s interest payment goes toward negative equity is a new tracking requirement, and Bohi pointed out there has never been a reason to break those figures out before. Meanwhile, dealer communications have painted a rosier picture: NADA circulated social media materials in April 2026 telling members the deduction was a chance to save customers money with no extra paperwork on the dealership side.

Adoption so far has been modest. Treasury data released in July 2026 showed that more than 1.4 million filers claimed the auto loan interest deduction on their 2025 returns, with an average benefit of just over $1,800. Against roughly 16.3 million new vehicles sold in 2025, that works out to about 8.6% of transactions — a reminder that a deduction on paper and a deduction consumers actually use are two different things.