Get Started
Talk to our team to start saving 800.260.5355
Refinancing your car can be a smart financial move, but it’s important to consider the full picture before making a decision. Beyond finding a new loan that saves you money, there are potential tax impacts to keep in mind. For example, do you pay sales tax when refinancing? Are there any tax benefits of refinancing?
In most cases, refinancing won’t trigger sales tax, but there are a few exceptions. Further, if you’re eligible to deduct car loan interest on your taxes, refinancing will likely impact the amount you can deduct. Read on for a closer look at how auto loan refinancing can affect you on the tax front.
Sales tax is triggered when a vehicle is sold from one party to another, such as when you buy a car from a dealer or private party. During a refinance, however, you’re not buying the vehicle; you’re retaining ownership while replacing your existing loan with a new one. As a result, borrowers don’t generally have to pay sales tax during the refinance process.
However, refinancing may trigger sales tax if it involves a transfer of ownership. For example, Texas charges sales tax when a person provides an existing car owner with compensation to be added to their title as a co-owner. If your refinance involves adding or removing a co-owner, you’ll want to check your state laws to see if sales tax will apply.
While there aren’t specific refinancing deductions on taxes, there may be opportunity to deduct your interest. Car loan interest hasn’t historically been deductible unless you’re a business owner using a financed vehicle for business purposes. However, the recent passing of Trump’s One Big Beautiful Bill (OBBB) changed that.
Effective for tax years 2025 to 2028, individuals who have a modified adjusted gross income (MAGI) under $100,000 ($200,000 for joint filers) can deduct up to $10,000 in qualifying car loan interest per year. For those making over $100,000, the maximum deduction limit is reduced by $200 for each $1,000 of MAGI over $100,000.
Qualified interest refers to interest paid on secured car loans originated after December 31, 2024. To qualify, a loan must finance a new vehicle that will be used for personal reasons. Further, the vehicle financed must be a car, minivan, pick-up truck, motorcycle, or SUV that undergoes final assembly in the U.S. and has a gross vehicle weight rating of less than 14,000 pounds.
As for the business deduction, a business owner can generally deduct interest on a debt if the proceeds of the loan are used for business expenses. In the case of auto loans, the amount of interest you can deduct depends on how often you use the financed vehicle for business purposes. For example, if you use a vehicle for business 70% of the time, you can deduct 70% of the interest you pay on your car loan.
The interest rate on your car loan determines your total annual interest costs and, in turn, is used to calculate your car loan interest deduction. As a result, when you refinance, any change in your interest rate will alter your interest costs and deduction amount.
For example, say you owe $32,000 on a car loan that has an 8% interest rate and 48 months remaining. If you refinance into a car loan with a 6% interest rate and the same 48-month term, your total interest costs will drop by about $1,367. As a result, the total amount of car loan interest you can deduct over the next four years would also decrease by $1,367.
If you want to reduce your total interest costs even further, you could choose a shorter term—say 36 months. While this would increase your monthly payment by about $194, it would lower your total interest and deductible car loan interest by approximately $2,394.
Note: Car loan interest deduction amounts are also subject to certain limits, which vary depending on your situation.
A smaller car loan interest deduction may be a drawback at tax time, but it means you’re paying less in interest throughout the year, which typically saves you more in the long run.
Still have questions about the tax impacts of refinancing your auto loan? Consider reaching out to a tax professional, especially if one of the following situations applies to you:
A tax expert can walk you through the potential tax impacts of a refinance and assess whether they negate or add to the benefits of the transaction. Plus, with all the new tax laws going into effect this year, gaining clarity early can help you avoid last-minute stress during tax season.
Auto loan refinancing may help you reduce your borrowing costs. But before moving forward, it’s important to shop around, compare quotes, read lender reviews, and consider how changes in interest rates or ownership could impact your taxes. By taking time to understand the full picture, you can prevent surprises down the road.
Ready to get started? Learn more about the typical auto loan refinancing documents you’ll need during the application process.
Find quick answers on how auto loan refinancing can impact your taxes.
You don’t typically need to pay sales tax when you refinance your car loan because you’re not purchasing the car from another party. You’re retaining ownership of the vehicle and replacing your current loan with a new one. However, if you’re adding or removing a co-owner, sales tax may apply. Laws vary by state.
Refinancing won’t affect your car’s value for tax purposes because the value of a vehicle isn’t dependent on the loan used to finance it. State governments rely on other methods to determine the value of vehicles for tax purposes, including looking at pricing guides, original costs, and depreciation tables.
In most cases, borrowers won’t have to pay sales tax during an auto loan refinance. However, your state may require it if a refinance is happening in conjunction with a transfer of ownership, such as if a co-owner is being added to the title.
Yes, refinancing typically impacts the amount of car loan interest you can deduct on your taxes. Since the deduction is based on the total interest paid during the tax year, any change to the loan terms that affects your interest costs will also impact your deduction. For example, if refinancing lowers your annual interest costs by $200, your deduction would also be reduced by $200.
From disposition fees to taxes, see what lease buyout fees you might face and how to avoid paying more than you should.
