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Negative equity, trade-ins, and add-ons
If you rolled an old loan’s balance into your new car loan, only part of the interest qualifies.
When your loan finances more than the car itself, the rules split it: proposed reg
| Qualifies (part of the car’s price) | Does NOT qualify |
|---|---|
| Vehicle price, sales tax, dealer fees, service contracts & extended warranties | Negative equity from a trade-in, GAP insurance, other insurance, cash-out |
IRS-style example: a $50,000 loan = $4,000 down + $6,000 negative equity rolled in → $48,000 of the loan qualifies, $2,000 doesn’t. Your deductible interest is pro-rated to the qualifying share.