Interestingā¦ Is this implying that the lease payments are factored into the cost basis, which wind up making the sale effectively a loss hence the no taxes? Or am I misinterpreting that?
Thatās certainly the implication. Your equity is purely a result of the money you have paid in to your lease.
2 Likes
I donāt care what you do, or what you can afford. I just think asking internet randos for tax advice is a recipe for bad outcomes. But you go off, king.
2 Likes
Yes, exactly.
Think of it this way, say you financed a car for $50k, you decide to sell it in 3 years for $27k when your loan payoff is $20k. You walk away with $7k in equity. No one would even think to consider the $7k as a capital gain in this case.
Itās really no different with a lease.
I guess having equity with a lease is unexpected and a rather new phenomenon over the past 2 years, so folks mentally consider this a some type of āfree moneyā which they should owe taxes on, but generally speaking that is not the case.
1 Like
Just stirring the 
3 Likes
I think a factor in that discussion is a lack of knowledge on their part regarding lease contracts.
In many states, a lease contract with a below market purchase option, as would be the case in a lease purchased with equity, is treated as a purchase from the beginning for cash basis purposes.
Further, what they really dont dive into is a case when a 3rd party dealer essentially purchasing your below market purchase option, the value of which is determined by the money you have spent.
That all really just goes to say this isnt a super cut and dry situation and should be discussed with oneās accountant.
3 Likes
Pretty sure Intuit / TurboTax has a message board that qualified parties can respond to questions a la LH style which may be a few more grains of salt than here.
I thought the toilet emoji would stand in the place of at least a hundred disclaimers. 
2 Likes
Just think itās important to add some context since reading their responses seem to be missing some important lease contract nuances
Lots of interesting points in that thread, although it leaves me with more questions than answers .
I heard back from my accountant this morning and his conclusion after consulting one of his colleagues was that lease payments do NOT count towards the cost basis, and so my $6k gain would be subject to long-term capital gains. Although now that Iām writing this out, itās not clear to me why this would be considered a long-term gain.
Hereās another similar thread, where thereās an argument made that if a third-party buys out the lease directly and so you never actually take ownership of the vehicle, then this isnāt a capital gain at all and the proceeds would count as ordinary income: What is the cost basis in a leased car that was sold for a gain, but which I never had possession of?.
I also found this Reddit thread with a pretty interesting breakdown by someone who argued that this would be a short-term capital gain: Reddit - Dive into anything.
Finally, hereās another long Leasehackr thread with a lot of different opinions: Positive equity from Lease sale considered Income?.
Another point of confusion for me in all this has been whether I ever technically took ownership of the car or not in this process, and whether that matters for the tax implications. My laymanās understanding of this transaction was that Rodo bought my car directly from Honda (maybe via some dealership?), and certainly I never explicitly took an action to exercise my buyout option with Honda directly, but the bill of sale from Rodo lists me as the seller. Not sure if any of this matters, just another wrinkle thatās caused me some confusion.
As much fun as this has all been, Iām not sure I want to push back on my accountant anymore since his long-term cap gain conclusion is relatively favorable, and frankly Iām more convinced so far by the arguments that this is ordinary income or a short-term cap gain than I am by the arguments that lease payments factor into the cost basis and no tax is owed. Iād love to be wrong about that if someone has any suggestions for how I should respond to my accountant, but I think Iāll probably just leave it here.
Anyway, thanks for all the good feedback and resources!
Iād drop that CPA
1 Like
Why do you say that? Whatās your take on all this? Iām not entirely in love with this CPA for other reasons, so I might drop them anyway, but Iāve read so many conflicting arguments about this that I donāt think I have any idea whoās right, so Iām not sure Iād drop my CPA for this specifically.
How could it be a long term capital gain if the money paid doesnt count as a basis?
Long term cap gain seems like the most unreasonable conclusion.
I would also overemphasize the whole lease with a below market purchase option treated as a sale aspect of this.
2 Likes
Just imagine you are about to get a brain surgery and your doctor is not sure how exactly open your head and asks his colleague for advice. Would you still let him do it? 
Every situation is different and my CPA gave me the answer as soon as I opened my mouth. Time is money lol
3 Likes
Mr. Cavallaro, please stop posting your capital gains tax deliberations attached to your name. Are you aware this site is public?
@mattevan I am indeed aware. Iām doing research and posting here in an attempt to understand the tax implications so I can do the right thing, so I didnāt think there was anything wrong with this being associated with my name. But I hear you ā I suppose itās one of those things that canāt really help but could hurt.
In any case, I think Iāve only become more confused and less sure as Iāve done more research, so I better step away from the keyboard and let the professionals handle this :-). I really appreciate all the great input here, Iāll definitely keep an eye on this forum through the year until tax season, Iām sure I wonāt be the last person asking about this scenario.
Youāll have to pay taxes on the flipped profit. It will be treated as capital gains if you file it. If rodo doesnāt issue a 1099 or another tax form you might as well not show it on your taxes. But do the right thing and file it. The good news is that rodo is a dealer buying the car from the bank so you donāt have to pay sales tax on the 19kā¦but you knew that already. 
What about all money that You pay HMF in the monthly payments? By the end of the day You just got some of them back. Not sure where do You see taxable profit?
As another internet rando, I completely agree that lease payments are part of the cost basis. If ir werenāt for those payments, the purchase price wouldnāt be as low as it is. Iād also argue that I had to take good care of the vehicle to maintain its value. Storage, maintenance, and insurance were all costs. I never gain a damned thing from any vehicle sale. The equity merely lowers my effective cost.
3 Likes
This topic was automatically closed 60 days after the last reply. New replies are no longer allowed.