Lease buyout residual value

my lease is up in couple month and I decide to buyout with cash.
1, Can I make a large payment now towards lease to reduce the residual value, so I can pay less tax on purchase or no matter what amount is on final paper, DPS will charge tax base on year and mileage (TX charge 6.25%)?
2, the 6 months extension have same payment amount, and all of these amount will be subtract from residual value, so I should take advantage of these 6mo and not rush to buyout now?

Thanks in advance.

  1. No, this would go towards your lease payments.

  2. No these are in additional to your buyout value (residual value, plus sales tax, and buyout fees).

Without an “owners choice” program (where the deal is structured like a lease, but you get the title in your name upfront) buying out in TX never makes sense because you are getting double taxed. You paid sales tax on the final sales price of the car when you first leased it and, assuming the title remains in the name of the financing company, you will pay tax again when you “buy out” at the end of the lease.

I believe you’re wrong, but I dont deal with Texas Texas as much as some other people.

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Hm interesting. The BMW wiki has the following description for its Owner’s Choice option:

Alternative Financial Products - Owners Choice (for TX, GA, IL)

BMW has a special financial product for Texas, Georgia and Illinois called Owners Choice which is similar to a balloon loan but with the advantages of a lease. It was intended to circumvent the issues related to customers potentially paying double tax on a lease and then taxed again on the vehicle buyout. Owners Choice puts the vehicle registration under the customers name to avoid the double taxation, this means for PHEV’s that have not been registered that the customer can benefit from the Federal and State tax rebates creating some of the best deals possible.

I think 3.70(b) and © of the Admin Code are maybe getting at that situation where the lease is viewed as a purchase by the state whereas clause (d) appears to say if there was nothing to suggest the lease was truly a purchase at the outset you might get dinged again:

“(d) If the motor vehicle is sold to a person not privy to the lease or if it is sold to the lessee at fair market value, the amount subject to the motor vehicle sales and use tax is the agreed-upon sales price. (See Attorney General Opinion WW-711 (1959).)”

So I think there is some risk in Texas absent a special financing arrangement.

Interesting, I can only speak for what I can find on the forum. I don’t deal in Texas, and @electric is much more qualified than me, maybe get his 2 cents?

@IAC has a resident state and local specialist, so agreed I just didn’t think the rules are super clear and so point was for OP to be certain of his or her consequences before making a decision.

Owners Choice was created before Texas amended to exempt lease-end buyouts AFAIK @HersheySweet is correct: there is no double taxation for the lessee because the sales price was taxed at inception

I’m not sure - the Admin Code section with the rules doesn’t seem like it has been amended since 2000. There is this other thread on the subject as well:

I actually think the reason this issue exists is the tax in the first instance (at inception) is imposed on the lessor under the statute—so the bank or financing arm of the brand—but they usually pass that along to the lessee by rolling it into the payments unless tax credits are available etc. A subsequent sale to the lessee at the end is also subject to tax because it is a separate transaction between the lessor and lessee. That seems to be how the lessee potentially ends up eating it twice.

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I’m going to have to agree with @asfarr86 here. To be fair, he’s also a tax attorney, so he knows what he’s talking about. I’m double-checking this now, but let’s just say that he has access to exactly the same resource as I do! :wink:

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I default to the tax attorneys. I retain my position of authority on baked goods however.

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There’s a Texas regulation 100% on point - Tex. Admin. Code section 3.70. “If the lessor sells the car to the lessee at the end of the lease under a purchase option clause, it is a sale taxed under the motor vehicle SU tax, based on the total amount paid.”

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