How to Claim Your New Car as Tax Deductible

When you buy a new car, you’ll likely finance a large portion of your purchase. Very few people can pay for the whole amount up front. Unless you are able to obtain 0% interest on your vehicle loan, your terms of repayment will include interest on the principal amount you borrow.

The financing terms depend on your personal financial situation. If you have excellent credit, you typically are eligible for the lowest available interest rates. If your credit is poor, you may not be eligible for a car loan or may have to pay high interest rates. If you have very little credit experience, you may not be able to get car financing or may be required to pay high interest rates.

In any situation, you’ll want to save as much money as possible. While your personal car isn’t eligible to be a tax-deductible expense, there is a way to claim the interest on your car loan as a tax-deductible expense.

Whether you have good credit, bad credit, or no credit, if you have equity in your house, you can turn the interest you pay on your car loan into a tax-deductible expense.

Part 1 of 3: Obtain a home equity line of credit

A home equity line of credit, also known as a HELOC, uses the equity you have in your home as a source to borrow from through your lender.

Step 1: Determine available equity. The amount of equity you have in your home is the amount your home is worth in the current housing market minus what you owe on the property.

Usually, a HELOC will only finance up to 80% of your home’s value minus what you owe on the property.

For example, if your home is worth $200,000 in the current market and you owe $120,000 on your mortgage, you have $80,000 equity in your home. If your lender only finances 80% of your home’s value, which is $160,000, then your available HELOC amount is $40,000, which is the difference between what you owe and 80% of your property’s market value.

Step 2: Consider your options with your lender. Discuss the options you have for a home equity line of credit with your lender.

Once you obtain the line of credit, you can begin the process of purchasing a car with tax-deductible interest.

Part 2 of 3: Purchase a vehicle with your home equity line of credit

Step 1: Make a sales agreement. Draw up a sales agreement with the car dealership to purchase your desired car.

The sale amount will be paid in full if you are using your home equity line of credit, so you have more negotiating power with the salesperson to get the best deal.

  • Tip: If you are not using the dealer’s financing options, often you are eligible for cash rebates of several thousand dollars, especially if the model year-end is nearing. Take advantage of cash rebates to further lower the sale price.

Step 2: Use your HELOC for payment. Complete the sale with payment from your HELOC.

Get a check or bank draft for the sale amount from your lender for the full sale amount. You can only claim the interest on the amount paid from your HELOC.

  • Warning: If you use a home equity line of credit for your car purchase, you need to be aware that your home is the primary asset on the loan, not the car. If you default on the line of credit payments, your house could be seized by your financial institution.

Part 3 of 3: Claim your car payment interest on your income tax

Step 1: Determine the interest paid on your HELOC for the year. Add the interest payments noted on your monthly statements to get the total for the year.

You can also contact your financial institution for a summary of the account.

irs form 1040
Image: Internal Revenue Service

Step 2: Fill out tax document. Complete Form 1040 Schedule A for your income tax return.

Schedule A is the form where you record your deductions for the year. Fill your interest amount from your HELOC on line 10 of the form.

If there are other amounts you need to claim on line 10, “Home mortgage interest and points reported to you on Form 1098,” add them together. Your bank is required to file Form 1098 to the Internal Revenue Service for the interest received on your mortgage, so be sure your numbers are accurate.

  • Warning: Mismatched information can result in delays processing your tax return and even penalties for filing a fraudulent tax return.

Step 3: Submit your tax return to the IRS including Schedule A. You may need to file your supporting documentation for interest paid if requested by the IRS.

Before purchasing a car through a Home Equity Line of Credit for the purpose of claiming the interest as tax-deductible, check with your accountant or tax professional to make sure it is legal for your situation, and have one of YourMechanic’s certified professionals perform a pre-purchase inspection to make sure the car is in great shape.


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Attila

19 years of experience
906 reviews
Attila
19 years of experience
Cadillac SRX V6-3.6L - Pre-purchase Car Inspection - Edison, New Jersey
Attila was great! Very knowledgeable and actually detected a fault during a pre-purchase inspection that would have cost me later.
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He is very good—offered all the significant details we needed from the inspection. Helped us figure out what needed to be fixed.

Shawn

12 years of experience
285 reviews
Shawn
12 years of experience
Chevrolet Impala V6-3.6L - Pre-purchase Car Inspection - Lansdale, Pennsylvania
Shawn was prompt, professional, and delivered the promised service as expected. This was a used vehicle pre-purchase inspection. Shawn also had to drive to multiple locations to perform the inspection, as the address listed that I provided him with was not accurate, but he still made it to the correct location within his time window and completed the inspection.
Toyota Sequoia - Pre-purchase Car Inspection - Akron, Pennsylvania
Shawn was very prompt in communicating with me and was good at helping me decide whether to purchase a used car. He help me avoid a car with a repaired rusted frame that could be a danger to my family's safety since we were planning on using the car to tow a travel trailer!

Luis

18 years of experience
320 reviews
Luis
18 years of experience
Honda HR-V L4-1.8L - Pre-purchase Car Inspection - Warren, New Jersey
Luis was great. He showed up on time, acted professionally, and gave me confidence with a pre-purchase car inspection.
Acura RDX - Pre-purchase Car Inspection - South Hackensack, New Jersey
Luis did a thorough pre-purchase inspection for me, and found several major issues that made me pass on buying the car. Had I purchased the car, I almost certainly would have ended up paying thousands in repairs down the road. Thanks Luis!

Robert

20 years of experience
1089 reviews
Robert
20 years of experience
Hyundai Elantra L4-2.0L - Pre-purchase Car Inspection - Englewood, Colorado
He did a pre-purchase inspection for me. He was knowledgeable and fast, and knew what he was looking for. I really appreciate all the pictures and documentation he took of the state of the car before purchase. He noted potential issues with the car that I wouldn't have been able to notice. Would recommend.
GMC Savana 1500 - Pre-purchase Car Inspection - Golden, Colorado
I trust Robert. He gave me a list and we will take care of it the week of June 29. I will know then that my vehicle is ready for the winter and is safe to drive. I look forward to getting things ready for another winter of careful driving.

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