Trading in vs selling current car for a lease

Ask the Hackrs Buy/Finance
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Washington State. Leasing novice and financial unwizard (as evidenced by desire to lease a new car in general).

I am considering lease of a new Volvo XC60 T8 (PHEV). I have a 2019 Honda Ridgeline (24-28k value) to part with (fully paid off).

The conventional wisdom to avoid downpayment on lease makes sense. At the same time, as I understand it, there is a decent tax break when trading in, since the taxed value will be (New Car - Trade In). This changes the new car price from about 75k to about 50k. Napkin math shows this tax reduction being around $2500.

Assuming I can get the trade-in price I would like, pros of trading in are:

  • tax saving of $2500
  • much lower monthly payments
  • very convenient sales process of existing vehicle (vs selling to public)
  • drive old vehicle to dealership, leave in new vehicle (I live some distance away so this is big)

Cons are:

  • You’re not “supposed” to pay lease upfront due to opportunity cost and liability in case of vehicle damage. However, I might additionally buy out this lease early in order to gain the advantage of the $7500 credit only for leased PHEVs, not for sales. This would incur the same con, but also reduce the vast majority of the lease “rent” fees.

I am inclined to consider the trade-in option, but I am probably overlooking something. Is it simply always better to sell old car for cash and keep the lease entirely seperate? Or does the trade-in tax impact this?

2 Likes
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separate is for best value.
Did you check Carmax / Carvana/ GivemetheVin and get any bids from them?

Though the Volvo is a nice car but I would keep both cars instead. Especially since the ridgeline is a truck and it’s going to be useful in spots the Volvo won’t be.

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What else are you open to?

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Yes I did get 24k from Carvana and 25k from Carmax. Haven’t seen GivemetheVin, I will take a look.

The RL is a fantastic truck - but after the first two years I have barely used the bed (except to help others move) and it does take a fair bit of gas, and is a little big to park. I was using it initially for lumber and landscaping materials but have switched to having that stuff delivered. Meanwhile, my wife has a van which can carry full sheets of plywood and is fine for camping. I rarely go off-road. I did end up loving the interior comfort of the top-trim which is what led me to looking at entry-level luxury vehicles such as the Volvo, Audi, Lexus, etc. My location and needs seem a perfect match for PHEV.

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I’m fairly focused on the Volvo. I was looking also at the Lexus NX450h+ but availability is low, it seems glitchy and buggy, it is ugly, and bougie as this is, doesn’t come with heated rear backseats (important here in the NW).

I did hear back from an auto-purchasing consultant who clarified that I absolutely should not consider trade-in and only pursue a direct sale (including firms like Carvana), so I guess my question here has been answered.

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I would agree, but a Volvo takes a bit to get used to.

  • The infotainment is a bit ‘restricted’ and doesn’t give you many options to customize. TPMS is a green / brown / red? light. So you never know when you should top up your tires until they are 10 lbs low and pretty critical. (I took the car in randomly and found out I was 10 lbs down..and no TPMS light in the car)
  • If you get the ‘butt2start’ version, leaving the driver seat means your passengers sit in a car that is off and dark.
  • And this really nasty bug in the software where all sound shuts off requiring you to ‘Did you Turn it Off and then On’ is really starting to annoy me.

Did you look at the Sorrento or the Tucson / Sportage AWD PHEVs? They have some good deals as well.

And of course get it really soon, before the Tariffs kick in.

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Definitely, you’re overlooking option C.

You can still trade in your car to same dealer on the same deal, but instead of applying the entire $25k as a down payment, have them apply $1k as your DAS and write you a check back for the other $24k.

Putting $25k down on a Volvo lease is crazy.

Also AFAIK Washington taxes the monthly payment, so your tax “savings” with putting $25k down isn’t correct either.

I’d start by building a dummy deal with the LH Calculator on whatever new car you decide on, you can easily play around with all the variables of the trade and taxes etc. to see what makes the most sense.

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Thank goodness somebody set the OP straight on this deal. Plus I think all the good Volvo deals are gone for now. Wait until the end of the year and see if some of those deal return.

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Thank you! I was also set straight on the tax thing by an auto-buying consultant. Asking the dealer to purchase existing car and giving cash for the remainder is great, I will see if that is possible.

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Don’t “see if that is possible”, tell them that is what you want to do.

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Does it though? On a lease in a state that taxes the monthly payments?

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I was wrong with these calculations. As mentioned in the first line of the post, I am not familiar with auto financing etc. I’ve since been set straight that the tax advantage is not very significant.

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If you used the trade as a cap reduction, it (cap reduction) would not be subject to tax. However, if you used cash in lieu of the trade, the cap reduction would be taxable. Perhaps that’s what you were thinking. Either way, it’s not prudent to put money down on a car whether you lease or buy. You risk losing all or part of your down payment (i.e., cap reduction) in the event the car is stolen or totaled. Furthermore, a car is a depreciating asset and, as such, it is an expense, not an investment. Also, @max_g is correct. A trade used as a cap reduction does not change the car price. You still have contributed money whether it’s a trade or cash. Remember that, generally, sell price - down payment = amount financed where sell price is fixed and the latter two are variable.

Having the dealer cut you a check and using it to pay the DAS and pocketing the balance is the best strategy. Use those dollars for other more worthwhile goods and services rather than tying it up forever in a depreciating asset. The only exception might be if your cost of money (e.g., money factor, interest rate) far exceeds your after-tax opportunity cost of investment. However, there are other tangibles and intangibles to consider that involve personal preferences for which there are no wrong or right answers.

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You’re not saving $2500 in tax. You only pay tax on the lease monthly payment. It’ll reduce taxes a little bit nowhere near $2500. More like $500ish over the course of the lease.

Sell the car independent of the lease, and put that amount in a CD. You’ll come out way ahead.

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Hope it’s ok to bump an old thread, since my question is on the same situation & state.

My understanding is the only tax DAS for a lease would be for any taxed incentives. As multiple users mentioned, I know there’s also tax on each monthly payment.

Because of the tax on incentives, it seems like there would be significant value in using a trade-in when the incentives are substantial. Is that incorrect?

I suspect I’m WAY over-complicating this. But wanted to share more details that you can skip if the answer to my question is “yes” :slight_smile:

Research:
I looked at all SIGNED! posts for WA from 2025. Only one with a trade & a calc link either isn’t correct or isn’t comparable, because the current incentive IS taxed.

So let’s try my own example…

Example: Used car valued @ 5k, leasing new car valued @ 60k.

Calculator link with no trade in

Calculator link with trade in:

Upfront taxes DAS = $2258, which is the tax for 16500 of incentives + 5k trade

  • Wait…I pay sales tax to sell a car I already paid sales tax on?

I searched for info from the state. I’m confused by the DOR’s example for a lease. They refer to “the two methods can be used in combination”, but I’m not seeing two methods.

Applying trade-in to leased items

Owned items (even encumbered) may be traded-in on leased items of like kind. Two methods are used to apply the trade-in value to the lease.

  1. The trade-in value may be applied against the value of the leased vehicle, thereby reducing the monthly payments and the sales tax due on those payments. Example: A dealer leases a vehicle for 36 months at $250 per month. The value upon which the lease payments are based is $9,000. A customer trading in a vehicle for $2,000 reduces the payments to $195 per month for 36 months. Retail sales tax would be due on the $195 lease payments.The trade-in value can be applied against the initial lease payments, with no retail sales tax due until it is used up.
  2. Using the example above, retail sales tax would not be collected during the first eight months (8 x $250 = $2,000). Retail sales tax would be collected on all of the $250 lease payments thereafter.

The two methods can also be used in combination with each other.

Let’s use my previous example link with the trade in.

Total value of pre-tax lease payments would be 320 x 36 = 11,520

So I wouldn’t pay any sales tax on the first 15 payments (320 x 15 = 4800), partial sales tax on the 16th, and full sales tax on the final 20.
320 x .105 = 33.60 per payment, so roughly $500.

Grand scheme of things, that’s pretty minimal and is likely offset by a better trade-in offer from someone other than the dealer.

What do I need to do to offset the taxes from the incentives?

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Bumping again.

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No.

Not sure anything will offset that line item.

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Any idea why the calc adds sales tax on trade then?

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If you use that money as a cap cost reduction the CCR is probably taxable.

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Yes, that is why. Otherwise somebody could essentially do a one-pay lease and have $0 monthly payments and pay $0 tax. Any money put down to reduce monthly payment gets taxed upfront.