Randy J. Elder, CPA, P.C.

Financing the purchase a new automobile this year? Check here for tips on interest deductions.

If you plan to finance the purchase of a new vehicle this year you’ll want to determine in advance if the interest on your vehicle loan will be deductible. Of course, in the world of the IRS and taxes, there is generally no simple answer. The interest on a vehicle loan is no exception. To determine whether or not the interest you pay on a loan to purchase a vehicle depends on;

Vehicle loans and tax deductions

If you obtain a consumer loan that is secured by your new vehicle, then the following rules apply.

Another approach to consider if you believe the interest deduction could be to your advantage is to use a home equity line of credit to finance the purchase of your vehicle. In general, current tax law allows individual taxpayers to borrow up to $100,000 of home equity and deduct the interest on that loan as home mortgage interest. This applies even when the loan is used to purchase a vehicle.

Before you rush out to borrow against your home there are a few things you should consider.
Make sure you can pay the home equity line of credit off over the same period of time you would have had to pay the consumer loan. Otherwise, you may reach retirement age without having the home paid for or worse. Don’t forget the trouble many taxpayers ran into during the last recession by borrowing heavily against their homes and counting on appreciation.

When buying a vehicle, you can often get very favorable interest rates or a rebate. Make sure you compare the difference in total loan payments over the life of the loans to the rebate amount and weigh the benefits of interest deduction vs. rebates to determine the best option.

Last but certainly not least, if there is any chance of defaulting on the home equity loan, it is likely not the best course of action. Defaulting on any loan is bad but the repercussions from defaulting on a home loan are far more serious than on consumer debt.

If you have any questions about the tax related issues related to financing the purchase of your next vehicle, please give me a call.