How to claim your new car is tax-free

When you buy a new car, you will most likely fund the majority of your purchase. Few can pay the full amount up front. If you can't get a 0% interest rate on a car loan, your repayment terms will be…

When you buy a new car, you will most likely fund the majority of your purchase. Few can pay the full amount up front. If you cannot get a 0% interest rate on a car loan, your repayment terms will include interest on the principal amount of the loan.

Financing conditions depend on your personal financial situation. If you have excellent credit, you are usually entitled to the lowest interest rates. If you have bad credit, you may not qualify for a car loan or you may have to pay high interest rates. If you have very little credit experience, you may not be able to get a car loan or you may have to pay high interest rates.

In any situation, you want to save as much money as possible. While your personal car is not tax deductible, there is a way to claim car loan interest as a tax-free expense.

Whether you have good credit, bad credit, or no credit, if you have equity in your home, you can turn the interest you pay on your car loan into a tax-free expense.

Part 1 of 3: Get a home equity line of credit

A home equity line of credit, also known as a HELOC, uses the equity you have in your home as a source to borrow through your lender.

Step 1: Determine Available Capital. The amount of your home equity in your home is the amount your home is worth in the current housing market, minus what you owe for the property.

Typically, HELOC will only finance up to 80% of the value of your home, minus what you owe for the property.

For example, if your home is worth $200,000 in the current market and you owe $120,000 on a mortgage, you have a net worth of $80,000 in your home. If your lender only finances 80% of the value of your home, which is $160,00040,000, then your available HELOC amount is $80XNUMX, which is the difference between what you owe and XNUMX% of the market value of your property.

Step 2: Consider options with your lender. Discuss with your lender the options you have for a home equity line of credit.

Once you receive a line of credit, you can begin the process of buying a car with tax-free interest.

Part 2 of 3: Buy a car with a home equity line of credit

Step 1: Conclude a sales contract. Draw up a sales contract with a car dealership in order to purchase the desired car.

The sale amount will be paid in full if you use the equity line of credit, so you have more room to negotiate with the seller to get the best deal.

• FunctionsA: If you don't use dealer financing options, you're often eligible for cash rebates of several thousand dollars, especially as you near the end of the model year. Take advantage of cash discounts to further lower your selling price.

Step 2: Use your HELOC to pay. Complete the sale with payment from your HELOC.

Receive a check or bank check for the amount of the sale from your lender for the full amount of the sale. You can only claim interest on the amount paid out of your HELOC.

• A warningA: If you are using a home equity line of credit to buy a car, you should know that your home is the main asset on the loan, not the car. If you fail to make a payment on your line of credit, your home may be confiscated by your financial institution.

Part 3 of 3: Claim interest on your car against income tax

Step 1: Determine the interest paid on your HELOC for the year.. Add the interest payments noted on your monthly reports to get the total for the year.

You can also contact your financial institution for a summary of the account.

Image: Internal Revenue Service

Step 2: Fill out the tax document. Complete Form 1040 Schedule A for your income tax return.

Chart A is the form on which you record your deductions for the year. Fill in the interest amount from your HELOC on line 10 of the form.

If you need to enter other amounts on line 10, Mortgage Interest and Form 1098 Points, add them together. Your bank must file a Form 1098 with the IRS for interest earned on your mortgage, so make sure your numbers are accurate.

• A warningA: Information inconsistencies can result in delays in processing your tax return and even penalties for filing a fraudulent tax return.

Step 3: File your tax return with the IRS, including Exhibit A.. You may need to file supporting documentation for interest payments if required by the IRS.

Before purchasing a car using a Home Equity line of credit to claim interest as tax deductible, check with your accountant or tax professional to see if this is legal in your situation and ask one of AvtoTachki's certified professionals to perform a preliminary due diligence. – checking the purchase to make sure the car is in top shape.