Very interesting. I too was under the impression the tax benefit is for lease only, and not purchase.
Does this only apply to vehicles purchased new?
Or would the same apply for a used car. Since we’ve been mentioned some higher end cars with high values; would the same tax benefit work if purchasing let’s say a used, 3 year old, Porsche?
Yes it would. What he suggested is to get a long balloon finance type loan on a CPO, then have low monthly payments. Then get rid of it before the balloon is due thus effectively getting a lower than lease price while preserving capital. On a purchase you can depreciate the car as an expense and also expense the % of biz usage on the loan interest, but not loan principal (that’s an asset)… if I understand correctly.
Look at PenFed payment saver loan.
I put this theory to the test:
I didn’t try it with MB because I find their leases to be reasonable. However, I tried it Porsche and I found that very few dealers do balloons. Even worse, very few sales people even know what the heck a balloon even is (I’m convinced they all live under a rock and just come out when its time to show a car).
In theory its awesome if the balloon is the entire purchase price and you’re doing interest only. But its not. It seems like its simply 2 sides of the same coin where the balloon is just the projected residual you’re forced to pay at the end of the term. It may be slightly cheaper to go with a balloon if you find a lower APR than what the money factor translates into but the difference is negligible.
The biggest risk is you’re sitting on a ticking timebomb. On a lease, you’re returning the vehicle. On a balloon you’re forced to find a buyer, refinance or pay off the note.
So far I tried doing this with a Panamera. I’ve been hard pressed to get in-house financing and when consulting Penfed, the numbers still don’t work out. I hope someone proves me wrong as I really want a Panamera.
Couple things:
Dealers don’t provide financing. They are just a retail interface for a captive finance company. So, for example, if MBFS didn’t do balloon financing, then no MB dealer using MBFS can provide you balloon financing.
It’s very unrealistic to expect IO balloon financing. At or toward the end of the term, the value of most cars would be way under the remaining/balloon payment, it would be reckless to underwrite such under-collateralized loans.
Probably still better to lease a Panamera as they’ll still depreciate pretty bad. Not as bad as a 7 series.
I read they have the highest resale values among all luxury cars.
Back to balloon financing. This is where theory doesn’t match reality. I still have not found a bank willing to do a true balloon. Instead, they turn it around and structure it as if its lease but instead of having a buyout option you’re forced to “buy” it off. The banks I’ve come across do not undercut the payment had you entered into a lease. Its not a true balloon but some variation and it makes sense for the bank as they limit their risk.
That being said, I’m finding the most applicable use for a balloon to be with reliable vehicles that both hold their value and qualify for a section 179 deduction. Its a very small lease. This may also apply to those that wouldn’t qualify for a lease and can’t afford the payments of a conventional loan.
What is a “true balloon”?
BMW are the only manufacturer that I know of that does balloon payments. Interestingly in the UK leasing is very rare and PCP (Personal Contract Purchase) is the norm, which is a balloon.
I had an Audi RS4 on a PCP in the UK and it worked very well for me. Overall cost of ownership was significantly less than had I purchased it but that’s as because they incentivsed the PCP quite a bit.
For me it allowed me to put a larger deposit into the car, because you owned the car, it just reduced your payment. I sold it and got nearly all of my deposit back, was paying £400 a month for a £72k car.