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Will the Interest on
Your Vehicle Loan be Deductible?
The answer to that question depends upon whether or not the
vehicle is being used for business purposes, where the expenses
are being deducted, and the type of loan. If the loan is a
consumer loan secured by the vehicle, then the following rules
would apply:
- If the vehicle is being used partially for business and
the expenses are being deducted on your self-employed business
schedule then the business portion of the interest will
be deductible as business interest, but the personal portion
will not.
- If the vehicle is being used partially for business as
an employee and the expenses are being deducted as an itemized
deduction, then neither the business portion nor the personal
portion of the interest will be deductible.
- If the vehicle is entirely for personal use, then none
of the interest will be deductible, because the only interest
that is still deductible as an itemized deduction is home
mortgage interest and investment interest.
As an alternative to a nondeductible consumer loan, you might
consider acquiring that vehicle with a home equity line of
credit. Generally, current 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 would also apply
to the purchase of a vehicle or motor home. Using a home equity
line will make the interest deductible.
Before borrowing against the home, you should consider the
following:
- Treat the home equity loan like a consumer loan and pay
it 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.
- When buying a car, you can sometimes get very favorable
interest rates or a rebate. To determine which is best,
compare the difference in total loan payments over the life
of the loans to the rebate amount.
- It is also good practice to make sure the benefit of
making the interest deductible is greater by using the home
equity line of credit than the benefit of the low interest
consumer loan or the rebate.
- If there is any chance of defaulting on the loan, the
repercussions from defaulting on a home loan are far more
serious than on consumer debt.
If you need assistance in deciding on a course of action,
please call our office.
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