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.
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.
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 ?
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.
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?