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starkyfubbs
Level 2

Capital Gains Tax from Buying Leased Car and Selling?

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.

4 Replies
Carl
Level 15

Capital Gains Tax from Buying Leased Car and Selling?

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.

 

Mike9241
Level 15

Capital Gains Tax from Buying Leased Car and Selling?

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.

starkyfubbs
Level 2

Capital Gains Tax from Buying Leased Car and Selling?

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.

starkyfubbs
Level 2

Capital Gains Tax from Buying Leased Car and Selling?

Understood. Thank you @Mike9241 .

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