Looking to figure out answer to tricky sales tax question in New York. Normally, when you trade in a car you own, the trade in credit goes against the sale price of new car, and you only pay NY sales tax on the difference. I.E., you buy a $30k car, trade in a $25k car, you only pay sales tax on $5k.
What if I have an expiring lease? The Residual payoff is $24k. But I don’t own car, BMWFS does. Current value is $27k. The dealer will give me the $3k equity. But do you get the trade in credit of full $27k because the car is worth $27k?
Carvana is structuring a trade in sale, where if I trade in lease and tell them the payoff amount they are still only showing sales tax on the $3k difference. Another dealer told me no, that is not right and you only get a credit of the equity so $30k - $3k = pay sales tax on $27k balance.
Seems like a tax loophole because by trading in expiring lease without buying it you are not paying the sales tax on the buyout price, but also getting the credit. So either Carvana is wrong (or doing something tricky where they are covering the sales tax owed and not telling me) or the dealer is wrong and this is really a tax loop hole.
I think the $3k would not be a capital gain because I still made all lease payments to get there. So it would just be recovery of some expenses I had and therefore not taxable as a gain. There truly was no profit when you think of the costs of the entire lease.
Actually, what you are describing sounds more like what happens in a state that taxes the selling price, such as Texas.
The selling price is reduced by the trade-in allowance and sales tax is computed on the balance - when it is a purchase. A lease, however, counts as a payment toward the lease. The lease is then computed on the reduced capitalized cost. The best way to think about this is that the equity is being used to pay the drive-offs and then once those are exhausted, used as a down payment.
If your lease is $500 per month and $4,000 at signing before the trade, and the trade has $5,000 of equity, you can exhaust the $4,000 drive-off and use $1,000 more to reduce the monthly payments by about $30 per month. Either way, it’s all taxed.
The dealer is correct. When you trade in a leased car before expiration, there is no tax benefit to you because you are not the owner of the car. The car is simply being paid off at its current buyout and any positive or negative equity is brought into the new deal if there is one, or the difference whether positive or negative, is paid to you or by you, if you are just merely getting out of the lease.
There is no tax loophole. You paid sales tax on the portion you rented. Only if you buy the car will you have to pay taxes on the remaining portion, just like any new or used car. When the car is sold again to whomever, there will be sales taxes on agreed upon purchase price that will paid by whomever purchases the car. Dealers are intermediaries that collect taxes on behalf of the state(s), just like when you buy something from Wal-Mart. There are no tax loopholes.
Thanks all. Looks like Carvana has it wrong then. I explicitly enter the trade-in with lease and payoff amount and it still shows a credit for full value of trade and corresponding reduction in sales tax. Appreciate the insight.
sure