I assume this vehicle was never used in a business of any type.

You must first determine if the agreement was a lease, or a conditional sales contract. If a lease, then your lease payments are not included in the cost basis of the vehicle.

If a conditional sales contract, then your lease payments are included in the cost basis of the vehicle.

if the lease payments are included in the cost and the vehicle was never used in business then the loss on sale is a non-deductible personal loss.

Correct @Carl. Vehicle never used in business, only personal use.

Looking at the original paperwork and jargon, it appears the agreement was a "Closed-End Motor Vehicle Lease Agreement" (CA), with a purchase option at the end of lease term.

It appears then, my lease payments should not be included in the cost basis, and I will have to owe ~$1760 in capital gains tax. That's unfortunate.

Regardless, thank you for the clarification.

Understood. Thank you @Mike9241 .

My leased car (3 yrs, for personal use) is due to be turned in to the leasing company (lease assigned by the dealer) or purchased (in 2022). As is generally true for used cars at this time, the car has appreciated in value during the lease period. 

CarMax has valued the car at $27,000. CarMax has offered to purchase the car by (1) paying the lessor the lease residual value (~$17,000) and (2) paying me ~$10,000. 

Q1. Is the $10,000 payment to me taxable?
Q2. If so, is it a long term capital gain or a short term capital gain?
Q3. If a capital gain, do I have any tax basis in the car reportable on Schedule D?
Q4. If ordinary income, how would I report it?

I paid sales tax on each lease payment.

Q5. Do I have any further sales tax liability associated with the above scenario?
Q6. Or does CarMax have a sales tax liability with its purchase of the car?

The answers to your questions are shown below for the sale of your leased car.  First you must determine what you actually paid for the leased car.  This would include any down payment, lease payments inclusive of sales tax.

Q1. Is the $10,000 payment to me taxable? Any gain after arriving at your cost basis will be taxable to you.
Q2. If so, is it a long term capital gain or a short term capital gain? The holding period (greater than one year) will provide long term capital gain.
Q3. If a capital gain, do I have any tax basis in the car reportable on Schedule D? Yes, see the information above.
Q4. If ordinary income, how would I report it? This is not ordinary gain, see Q2.

Q5. Do I have any further sales tax liability associated with the above scenario? The answer to this will come from CarMax or the origin leasing company.
Q6. Or does CarMax have a sales tax liability with its purchase of the car? Again, this information must come from CarMax.

Hi @DianeW777  I have couple of questions on your response on @robertburt1 question :

1- Are the monthly lease payments and the down payment upfront considered in cost basis ? Because those payments are not for financing they are just lease payments 

2-Also in capital gain section in TurboTax  or the forms there is always a question about  the date when the asset was purchased and the date when it was sold and  also whether the asset was purchased , inherited , ... 

Again in the above example ,  the car was never purchased by the lessee , it belonged to the lessor then went straight to Carmax using the lease buy out option in the lease contract 

So how should these dates be filled ?

Thanks!

If the leased car was never purchased and it went back to the lessor after the end of the lease, there is nothing to report on the tax return. You never owned it and therefore never sold it.

@_Q6727

Hello @@DianeW777 ,

To piggyback, I have a similar circumstance.

I was leasing a vehicle and 'sold' it to Carvana. Carvana dealt with the lessor to exchange the vehicle, and I was given a check for X amount of dollars above the lease payoff. During this sale I didn't take out any new loan, and the financial obligation for the lease agreement was paid off by Carvana.

I have two questions:

A) In this scenario, is the X amount of dollars beyond the lease (lessor) payoff that Carvana paid to me considered a capital gain?

B) Is this exchange between my lease agreement and Carvana considered brief "ownership" of an asset?

If the vehicle is used in a business and the agreement is a lease, are the payments included in the cost basis of the vehicle?

we don't know the terms of the lease. 

this is from an IRS website

Question
If you lease-purchase a piece of equipment for use in a trade or business, like a forklift or truck, do you deduct the lease payments or do you depreciate the cost of the equipment?
Answer
You must first determine whether your agreement is a lease or a conditional sales contract. If the agreement is a lease, you may deduct the payments as rent. If the agreement is a conditional sales contract, you consider yourself as the outright purchaser of the equipment. You may generally recover the cost of such property used in a trade or business through depreciation deductions.

Whether the agreement is a lease or a conditional sales contract depends on the intent of the parties as evidenced by their agreement, which is read in light of the facts and circumstances when it was entered into. Determine the parties' intent based on the facts and circumstances that exist when you enter into the agreement. No single test, or special combination of tests, always applies.

However, in general, you may consider an agreement as a conditional sales contract rather than a lease if one or more of the following conditions apply:

The agreement designates part of each payment towards an equity interest that you'll receive in the property.
You get title to the property upon the payment of a stated amount of "rental" payments required under the agreement.
The amount you must pay to use the property for a short time is an inordinately large part of the amount you would pay to get title to the property.
You pay much more than the current fair rental value for the property.
You have an option to buy the property at a nominal price compared to the value of the property when you may exercise the option. Determine this value when you enter into the agreement.
You have an option to buy the property for a small amount compared to the total amount you have to pay under the agreement.
The agreement designates some part of the payments as interest, or parts of the payments are easy to recognize as interest.

if you had a lease none of the payments add to your tax basis. your tax basis would be what you bought the vehicle for at the end. if it was a conditional sales contract only the principal portion of the payments would be part of your tax basis also include any cap cost reduction you paid at the start and the buyout amount. the total would be reduced by any depreciation taken for business purposes to arrive at your tax basis. selling at a gain you would first need to recapture the depreciation as ordinary income and excess gain would be capital gain. 

@starkyfubbs 

if you are a W-2 employee, this is easy - nothing is deductible

if you are an employee you can not deduct lease payments or depreciate the vehicle, but if you sell it for more than you cost the gain is taxable.

with a lease your holding period would not begin until the date of the buyout so you could have a short-term capital gain. if a loss, it's  not deductible. 

if you are self-employed, other complications arise if the use was not 100% business.

Thanks for the information everyone.

Mike,

For a lease, would a guaranteed residual value be consider part of the cost basis? 

On the other hand, it seems if the lease had a purchase option (or better yet, requirement) in the contract, then it may be a sales contract.