diff --git a/pkg/providers/instance/suite_test.go b/pkg/providers/instance/suite_test.go
index 58b3ebdecf63..0ba947c2c6e7 100644
--- a/pkg/providers/instance/suite_test.go
+++ b/pkg/providers/instance/suite_test.go
@@ -205,4 +205,38 @@ var _ = Describe("InstanceProvider", func() {
 		retrievedIDs := sets.New[string](lo.Map(instances, func(i *instance.Instance, _ int) string { return i.ID })...)
 		Expect(ids.Equal(retrievedIDs)).To(BeTrue())
 	})
+		It("should not consider subnet with no available IPs for instance creation", func() {
+		// Prepare the context, nodeClass, and nodeClaim as in the other tests
+		ExpectApplied(ctx, env.Client, nodeClaim, nodePool, nodeClass)
+		nodeClass = ExpectExists(ctx, env.Client, nodeClass)
+
+		// Update the EC2 API mock to include this subnet
+    	awsEnv.EC2API.DescribeSubnetsOutput.Set(&ec2.DescribeSubnetsOutput{
+    	    Subnets: []ec2types.Subnet{
+    	        {
+    	            SubnetId:                aws.String("test-subnet-1"),
+    	            AvailabilityZone:        aws.String("test-zone-1a"),
+    	            AvailableIpAddressCount: aws.Int32(0), // Exhausted
+    	            Tags:                    []ec2types.Tag{{Key: aws.String("Name"), Value: aws.String("test-subnet-1")}},
+    	        },
+    	        {
+    	            SubnetId:                aws.String("test-subnet-2"),
+    	            AvailabilityZone:        aws.String("test-zone-1b"),
+    	            AvailableIpAddressCount: aws.Int32(5), // Has IPs
+    	            Tags:                    []ec2types.Tag{{Key: aws.String("Name"), Value: aws.String("test-subnet-2")}},
+    	        },
+    	    },
+    	})
+
+    instanceTypes, err := cloudProvider.GetInstanceTypes(ctx, nodePool)
+    Expect(err).ToNot(HaveOccurred())
+
+    instanceTypes = lo.Filter(instanceTypes, func(i *corecloudprovider.InstanceType, _ int) bool { return i.Name == "m5.xlarge" })
+    instance, err := awsEnv.InstanceProvider.Create(ctx, nodeClass, nodeClaim, nil, instanceTypes)
+
+    // Assert that the instance is created using the subnet with available IPs
+    Expect(err).ToNot(HaveOccurred())
+    Expect(instance).ToNot(BeNil())
+    Expect(instance.SubnetID).To(Equal("test-subnet-2"))
+	})
 })