# trading in a car towards a lease. tax question.



## Presice (Jul 28, 2008)

Hi,

I am most likely picking up a new e92 in a couple of days. I will be leasing the vehicle. I currently have an '03 e39 which is fully paid off that I am replacing with the e92. Initially, I was thinking of trading in the car, but I think I may be better off selling it private party or to another used car dealer as I will get more $.

However, I don't understand the tax benefits of trading in a car towards the lease of another car. Can someone help explain this to me? Also, am I better off trading the vehicle into the same dealer I am buying the car from in order to take advantage of the tax benefits (will whatever extra money I get buy selling the car at a higher price to a third party be less than the tax break I'll receive by trading in the car directly)?

I am located in NY state, Nassau County. The car I'm trading in is registered here and I will be leasing the new car from a dealer here if that makes a difference.

Thanks for the help.


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## Bumer (May 23, 2008)

Presice said:


> Hi,
> 
> I am most likely picking up a new e92 in a couple of days. I will be leasing the vehicle. I currently have an '03 e39 which is fully paid off that I am replacing with the e92. Initially, I was thinking of trading in the car, but I think I may be better off selling it private party or to another used car dealer as I will get more $.
> 
> ...


Let me try to explain how it works for sell and purchase, trade-in, and lease.

First of all, don't be scared by phrase dealers will keep telling you "But you will loose your tax deduction". 

*Scenario 1.* You sell your car to one place, buy new car at different place.
It depends on how much you can sell it for, and how much dealer will give you as trade-in allowance.

_Example:_ Someone offered you $20K to buy your car. Let's say dealer would give you same $20K if you traded the car in. Your sales tax credit / benefit would be $20K X 8.625% = $1,725. *Now important*, that means that if you can sell your car on your own for $21,725, you are breaking even, and you'll just pay this portion of sales tax yourself when you buy new car. *But if* you can sell your car for more than $21,275, you are better off than trading your car in and getting sales tax allowance. And vise versa, if you are loosing tax benefit if you cannot sell your car for at least $21,275.

*Scenario 2.* You trade-in your car and lease. Almost same thing as if you are selling and buying, the dealer will still value your car, and either give you money, or apply car value toward future lease payments. But sales tax benefit will work same way, you will just pay sales tax over time of the lease on each payment.

I hope that makes sense, but feel free to ask questions if you need clarification.


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## Campfamily (Sep 20, 2010)

Here in California, we pay sales tax on the price of the new car, without consideration to any trade in. Example, if I pay $40,000 for a car, I pay sales tax on that amount. Now, say I trade in a car worth $20,000, so I only give the dealer $20,000 for my new car, plus I give him my old car. I still pay sales tax on the $40,000.

Not sure how that works for a lease, since I've never leased a car. I understand we pay sales tax on each lease payment. I'm wondering if the down payment (including whatever trade in credit you get) is also subject to the tax. That would make sense, plus would make it so that once again, the value of your trade in is irrelevant to the amount of tax paid.

BTW, the same applies (in California) to vehicle license fees. They are also calculated based on the value of the car, starting with the purchase price.

Keith


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## pony_trekker (May 26, 2003)

I would suggest you sell the E39. Very in-demand car.


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## ard (Jul 1, 2009)

Do keep in mind that any cash value you have in the trade may get rolled into the new leased car- and thereby 'lost' when you turn the car in (or if it were to get totalledt

For example, your new car is $60k, and the lease end residual is 34k in 3 years...say this is the 'baseline deal'.

Now you trade in a car worth $10k...dealer says 'wow, your monthly payments are much lower- and your residual will only be $26k.

But when it comes time to walk away from the lease, the car is worth 34k on the open market. You decide you don't want to buy it, and turn it in. You lose that value.

I know you were asking about tax, but make sure you understand HOW the value will be used in the lease. Someone above posted that they would "apply the value to future lease payments"...not necessarily. (FYI- this is a hypothetical, I am not overly familar with BMW leases...)

GL


A


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## Bumer (May 23, 2008)

ard said:


> I know you were asking about tax, but make sure you understand HOW the value will be used in the lease. Someone above posted that they would "apply the value to future lease payments"...not necessarily. (FYI- this is a hypothetical, I am not overly familar with BMW leases...)


Sorry if my post required more details, but if trade-in value is not paid by dealer, then trade-in can be applied only to future lease payments, down payment (including cap cost reduction). *Trade-in value of the car will not be applied toward residual value.*

So, to sum up, trade-in on lease of new car requires dealer to:
- pay for trade-in in cash (net of any loans on the car), or
- apply trade-in value toward lease payment, but not to exceed total lease payment over term of lease. Any excess, does not reduce residual value, and has to be paid.

I hope this clarifies more.


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## SARAFIL (Feb 19, 2003)

ard said:


> Do keep in mind that any cash value you have in the trade may get rolled into the new leased car- and thereby 'lost' when you turn the car in (or if it were to get totalledt
> 
> For example, your new car is $60k, and the lease end residual is 34k in 3 years...say this is the 'baseline deal'.
> 
> ...


trade equity does not touch the residual. It only reduces the amount paid per month over the lease term.

In your example, $60k cap cost and $34k residual. You have a $10k trade, your adjusted cap cost becomes $50k and residual is still $34k, and you calculate the payment accordingly. Or, you can ask for "cash back" and basically have them give you up to the $10k of trade equity back in cash rather than applying to the lease.


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## SARAFIL (Feb 19, 2003)

In states that allow trade-in tax credits, generally speaking any amount of trade equity that is applied as "cap cost reduction" is tax free. For comparison, any cap cost reduction paid in cash is taxable.


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## dalekressin (Sep 3, 2008)

Seems you will not avoid taxes in our state.


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