This topic has come up on Bogleheads and I, too, am wondering about IRS treatment. In some respects, a lease with an option to buy at a residual price strikes me as a purchase contract.
When one leases a car, the lease value, and hence the monthly payments, are based on the difference between the car selling price and the residual value. So roughly speaking, if you lease a car that sells for $30K new and has a residual value of $23K, then your lease payments will be based on the $7K difference (give or take). That's why you can reduce your monthly payment by prepaying a down payment - either cash or trade-in.
Let's say you prepaid $5K via trade-in, then paid another $1400 in lease payments toward the $7000 lease value. So you are out-of-pocket $6400. Had you purchased the vehicle for $23K, then sold it for $30K, you netted at most $600 because your total payment costs to own the vehicle were $5000 plus $1400 plus $23K. After all, your lease payments went toward reducing the purchase price of the vehicle.
But you did not go that route. Instead, the dealer paid you $7000 for the right to take over the rest of the lease and/or purchase the car. But you still had $6400 invested in that vehicle lease. You did not profit by $7000.
In my view, a lease with an option to buy can be viewed similarly to an option contract to purchase stock.
Stock ACME is selling for $100 today. I purchase an option to buy ACME for $100 in 12 months. That option costs me $10. In 6 months, ACME is selling for $120. My option, now with 6 months left, is priced at $25. I have two choices. I can sell my option for $25, in which case my profit is $15. Someone is willing to pay a premium because the option still has time value.
My other choice is I can exercise my option and purchase the stock at the option price of $100. At that point, my basis in the stock is $100 plus the $10 I paid for the option, or $110. I don't lose the option payment. It gets folded into my basis. If ACME rises to $130 at the end of the 12 month period, I can sell it then for a profit of $20.
So I would be happy to learn the IRS official position.
