We planned to keep 2 cars when signing a lease. But it turned out unnecessary. Now we want to buy out the lease. Can we trade in trade in another car in this buy-out, so as to save some sales tax?
Thanks!
I think it may be state specific, but in general, I am pretty sure there is no tax savings since it isn’t your car to sell to save on taxes. You take the equity and use that towards the new purchase or lease. Are you trying to go down to only one car but buy out your lease? If you want to just get down to one car, you can sell the lease without having to buy it yourself.
There are no trade in tax savings in California on a lease or a purchase.
7 Likes
By saving taxes, I mean compared with selling this trade-in car instead.
Assume the leased car is X with value $30k, and the owned car is Y with value $10k. Tax rate 10%. If we buy out X with Y as trade-in, I pay $20k + 2k tax. If we buy out X and sell Y myself, I pay $30k + 3k tax and get $10k. So effectively, $1k additional tax is paid.
What you suggested is to get ride of X. But we prefer keeping X over Y. Thanks!
Oh, thanks for calling this out. I have the impression we could save taxes from what our friend said.
Is this documented somewhere officially? I find this online, but not sure if it’s authoritative, because I do see some incentives are untaxed. So it’s not always the full price.
Do California Vehicle Taxes Apply to Trade-Ins and Rebates?
California’s vehicle taxes apply to the vehicle’s full price before trade-in credits or rebates are applied. Many dealerships offer credits for trade-ins that decrease your out-of-pocket cost for the vehicle. For example, you may get a $5000 credit for a trade in that you can apply toward a $15,000 car. You will only pay $10,000 for your vehicle, but the state still taxes you for the full $15,000 purchase.
https://www.caranddriver.com/research/a31553567/california-vehicle-tax/
Your friend may be confusing how things are handled in other states.
1 Like
You’re paying $3k in taxes in all those situations.
1 Like
Move to Florida and you will have your trade in credit with $1500 doc fee on top. 
Trade in credit doesn’t exist in CA. They will always tax you on the full amount of the car.
So how is “full price” of a lease buy-out defined here, the RV value?
What if the trade-in happens at the lease signing, and the trade-in credit is adjusted from the capitalized cost? That trade-in would save taxes, right?
Let’s say you are buying your leased car for $20k, you will pay 10% of the $20k as tax. There won’t be a change if you trade another car or not. You will still pay $2k.
Cap cost reductions are taxed up front in CA, so you’ll pay sales tax on the trade in credit value up front just like if you were paying cash. The only way around that would be to have the dealer give you way less than the trade is worth and then give you a huge dealer discount on the new vehicle.
In CA, on a lease buy out, tax is applied to the buy out price. If you’re at the end of the lease, that’s the residual value.
No, the leased car is $30k for buy-out.
Then you will pay $3k for taxes. Your trade will make no difference.
I guess that’s what happened with my friend. He is in CA as well. The dealer must have tried hard to keep his business.
I’d be curious to see his actual contract as well. A lot of people misinterpret contracts and don’t actually get the credits they think they do.
1 Like
Yeah, it seems so. We’ll ask the trade-in price. Hopefully it can be higher than CarMax etc.
So you have two leased cars now, want to trade both and get a new (3rd) car instead?
Seems like you are confusing a buyout vs a new purchase. With the buyout, there’s no negotiation or incentives. You will pay taxes on the buyout price.
A leased car X and an owned car Y. Plan to buy out X and sell or trade in Y.
If car X is an XC90, I highly recommend against it.
2 Likes