I’ve seen a lot of posts about leasing a PHEV instead of buying it in order to capture the $7,500 credit. Is it really as simple as it seems? I read Mercedes charges a large early payoff fee but it seems like Volvo does not (just the $350 termination fee). If it’s as advertised I can’t imagine it makes sense to do anything other than buy out one of these leases assuming you negotiated a good sale price as well.
With that in mind, is there anything else I can do ahead of time to optimize a lease contract that I intend to buyout? I mean things like higher down payment or anything like that.
If you’re in NY, you want to do a one pay first and then buy it out if possible to minimize your tax liability on the buyout.
Keep in mind that most dealers have no idea this works and will tell you that you have to make a significantly early termination penalty. You need to read the actual contract for the terms and ignore anything the dealer tells you. They’re often motivated to persuade you not to do this as an immediate buyout can keep them from getting any finance kick backs.
As for MB, in some regions, MB charges a 4% early buyout penalty. That isn’t true in all areas.
How does a one pay lease help? Do you just avoid all interest/rent charges completely and just pay the depreciation, fees, and sales tax on that depreciation+fee amount up front? I would absolutely read the contract ahead of time.
Because if you dont do a one pay it will look like this (ROUGH NUMBERS TO MAKE THE MATH EASY)
70k msrp
35k buyout
selling price 60k
the tax on the lease is the tax on the 25k of deprication.
That tax is either paid upfront or rolled into the payment THIS DOES NOT MATTER
Your immediate buyout includes all remaining payments less the interest. That means you pay tax on the taxed amount aka double tax on that depreciated cost
In NY, you pay sales tax on the buyout price. If you do a normal lease, and then buy out immediately, your buyout is basically the initial price. If you do a one pay, your buyout price is significantly lower, so you only pay tax on the lower buyout.
In either situation, you have to pay tax on the total lease payment, so ideally you’d do a one pay for the term that has the lowest money factor to lower your net tax liability.
So then if planning to buy it out, the best option is a one-pay lease or if not that, then do the shortest possible term (24 months would be much better than 36) so that I’m minimizing how much depreciation is being taxed in the lease?
Double tax….what a scam!!
Thinking about it more, it’s not just double taxation it’s compound taxation??? Paying sales tax on the sales tax….
Wouldn’t having lower depreciation (aka shorter term) have a bigger impact on tax than lower money factor since the interest won’t really be charged if bought out ASAP?
So lease payoff is basically residual value + remaining base monthly charges (which includes sales tax already) minus interest/rent charges not yet accrued? And then ALL of that is subject to sales tax? Hence the extra tax.
I’m sure I’m just repeating what you said but am I understanding it correctly?
You’re in NY, so you get to pay tax on the entire lease cost up front. Doesn’t matter if you buy it on day 1 or the last day. You’re paying tax on the full depreciation and rent charge. By selecting a one pay with the lowest money factor, you’re ensuring that as much of that initial tax goes to depreciation as possible. If you did a longer term with a higher money factor, yes, your tax on the buyout would be lower, but you’d pay significantly higher tax on the upfront amount.
You’re basically trying to optimize the total sales tax paid, which is the sum of both the buyout tax AND the upfront lease tax. You achieve that by minimizing how much tax is going to something other than depreciation.
On a one pay, your buyout is actually the residual value MINUS the unearned rent charge, so it’ll be a good bit lower than the residual value if you do an immediate buyout.
I have routinely done leases in NY where I don’t pay all the tax upfront. How would that have been possible?
Also, is there a way to know what my exact payoff at say month one will be before I sign the contract?
And then again; am I correct that a shorter lease term and therefore less depreciation (assuming unchanged money factor) would be better since that’s less double taxation?
You do leases in NY where the tax is all paid upfront and then the bank effectively grants you a loan for the value of the tax and rolls it into your lease then charges you interest on it.
No, because you don’t double pay for any depreciation on a one pay (that’s the whole point of electing to do a one pay in this situation). The only “extra” tax being paid is on the rent charge, which is why you want to select the term with the lowest money factor.
It’s the residual value MINUS the unearned rent charge plus purchase option fee, and that’s what’s subject to tax. So it can be substantially less than the residual value (and also means that the tax that was paid on the rent charge is at least somewhat going towards depreciation instead).
