After paying off the last lease payment for a personal car over 3 years, I bought out the lease at its residual value of $14000. I then transferred the title and registration to my name, and payed use tax (i.e. I briefly owned the car). After a couple weeks, I sold the car for $22000.
Do I owe capital gains tax on the $8000 gain? This assumes $14000 is the cost-basis. However, some believe lease payments should be included in the cost-basis. If that is the case, then my cost-basis (lease payments + residual) would be more than the sale, and I would have a loss, and therefore owe no gain tax.
Perhaps the question should be, are lease payments part of the cost-basis?
Thank you in advance. Called the IRS the other day to get clarification. After being placed on hold for 90 minutes, a worker told me they no longer have employees to assist with this tax question.
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.
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.