If you refinance your auto loan, is the interest still tax-deductible?

Key takeaways

• Most car loan interest hasn’t historically been deductible for personal vehicles, but a new temporary federal deduction is changing that for some borrowers.
  
• The deduction applies to interest on certain vehicle loans incurred after Dec. 31, 2024, for a new vehicle that meets eligibility rules, and it’s available whether you itemize or take the standard deduction.
  
• Refinancing can preserve eligibility, but cash-out refis (or refis that increase the balance above what you owed) may limit or wipe out the deductible portion.

In many cases, yes. If your original auto loan qualifies for the new federal “car loan interest” deduction, a refinance can still keep the interest eligible. But the IRS’ proposed rules add some guardrails: your refinance generally needs to stay secured by a first lien on the vehicle, and the deductible portion is typically limited to the amount you refinanced (no cash-out).

What has to be true for your original loan to qualify

Think of eligibility in three buckets:

1) The vehicle has to qualify

The proposed rules describe an “applicable passenger vehicle” as a new vehicle (original use starts with you) such as a car, SUV, pickup, van/minivan, or motorcycle under certain weight limits, and the vehicle must have final assembly in the United States.

2) The loan has to qualify

In general, it must be debt incurred after Dec. 31, 2024, used to purchase the vehicle, and secured by a first lien on that vehicle.

3) Your income can reduce (or eliminate) the deduction

The deduction is capped at $10,000 per year and begins to phase out when modified adjusted gross income (MAGI) exceeds $100,000 for single filers or $200,000 for married filing jointly (per the summaries of the proposed rules).

What happens when you refinance?

Refinancing changes your loan, and that’s exactly why the IRS addressed it.

The proposed regulations say a refinanced loan can continue to qualify if:

• The new loan is still secured by a first lien on the vehicle.
• The deductible treatment generally applies only up to the amount of the refinanced loan (i.e., you typically don’t get to “expand” what’s eligible via refinancing).

Quick table: common refinance scenarios and whether interest stays deductible

Refinance scenario	Is interest likely still deductible?*	Why it matters
Rate-and-term refinance (same borrower, no cash-out, new loan stays secured by the car)	Usually yes	Proposed rules generally let a refinance continue if it stays first-lien secured.
Cash-out refinance (you refinance for more than what you owed)	Partially (or not)	Proposed rules limit qualifying treatment to the refinanced amount and don’t generally expand eligibility beyond the prior balance.
Refinance that rolls in extras (fees/add-ons that push balance above old payoff)	Possibly reduced	If the new principal exceeds the refinanced amount, only the portion up to the old balance may count under the proposed rule.
Borrower changes (cosigner removed, loan transferred to someone else)	Often no	Proposed rules say interest is no longer eligible if the obligor changes, with a narrow exception tied to death of the original obligor.

*Tax rules are fact-specific, and the IRS guidance here is in proposed form. When in doubt, consult a tax pro.

One important point: refinancing could lower your deduction

A refinance that drops your APR can reduce the amount of interest you pay, which could reduce the amount you can deduct.

But that’s not a bad outcome. If you pay less interest overall, you may come out ahead even with a smaller tax break. The deduction is a bonus, not the main reason to refinance.

How to claim the deduction after you refinance

Even if your refinance keeps the interest eligible, you still need to be able to document it at tax time.

What to save

• Your original purchase/loan paperwork (so you can show the loan was used to buy the vehicle and was secured by a lien).
• Your refinance documents (especially the payoff and new principal amount).
• Your lender’s annual interest statement.

What you’ll file

The proposed rules say you must report the vehicle’s VIN on Schedule 1-A (or successor form) when claiming the deduction.

What to expect from lenders (especially for tax year 2025)

The IRS issued transition guidance explaining that for interest received in 2025, lenders can satisfy reporting by providing borrowers the total interest amount via an accessible statement method (portal, monthly statement, annual statement, etc.), and the IRS will provide penalty relief if they meet those requirements.

Mistakes to avoid if you want to keep the deduction

• Assuming any refinance qualifies. The refinance needs to stay secured by a first lien, and cash-out can limit eligibility.
• Changing borrowers midstream. Removing a cosigner or transferring the loan can trip the “change of debtor” rule.
• Mixing this up with itemizing. The IRS says the benefit can apply to taxpayers who take the standard deduction and those who itemize.
• Waiting until tax time to figure out VIN/interest records. You’ll need both to claim.

What to do if you’re thinking about refinancing now

Borrowers often refinance to lower their rate, lower their monthly payment, or change the payoff timeline. Taxes can be part of the picture, but they shouldn’t drive the decision.

A simple refinance gut-check:

• Compare APR first (that’s usually where the savings are).
• Look at total interest you’ll pay under the new loan vs. your current loan.
• Ask whether the refinance is cash-out or no cash-out.
• Confirm the new loan is still secured by the vehicle (not converted into something unsecured).

How to claim the deduction on your tax return

The IRS says you must include the VIN on your tax return for any year you claim the deduction, and lenders must provide statements showing the interest received (with transition relief in 2025).

Here’s how to claim your deduction on your tax returns:

• Enter your details (including VIN) on Schedule 1-A, Part IV, and file it with your Form 1040.
• For tax year 2025, lenders may not file a new IRS information return yet, but they still must provide borrowers a statement showing total qualifying interest paid — available by Jan. 31, 2026.

Bottom line

Refinancing your auto loan usually doesn’t wipe out the new car-loan-interest tax break, but it can shrink it. If your original loan and vehicle qualify, a standard rate-and-term refinance (no cash-out) generally keeps the interest eligible up to the amount you refinanced. If you refinance for more than what you owed (cash-out or rolling in extra costs), the IRS’ proposed rules indicate you may only be able to deduct interest tied to the portion that refinanced your prior payoff balance, not the extra amount.

FAQs: Are refinance auto loan tax deductible?

If I refinance for a lower rate, do I lose the deduction?

Not necessarily. Under the proposed rules, a refinance can continue to qualify if it stays secured by a first lien, and the deductible treatment generally applies only up to the refinanced amount.

If I refinance and take cash out, can I deduct all the interest?

Potentially not. The proposed regulations limit the refinance carryover rule “only to the extent” the new loan doesn’t exceed the refinanced balance — meaning cash-out can reduce the eligible portion.

Do I have to itemize to claim this?

No. The IRS says the new tax benefit applies to taxpayers who take the standard deduction and those who itemize.

Is this deduction permanent?

It’s currently described as temporary for tax years 2025–2028, and the IRS has issued proposed regulations and related guidance.