Do you pay sales tax on a lease buyout?

Sales tax is a part of buying and leasing cars in states that charge it. Like with any purchase, the rules on when and how much sales tax you’ll pay when you lease a car vary by state. If you buy your leased car at the end of your lease, you may also be required to pay sales tax as part of the purchase.

What is a lease buyout?

A lease buyout, which usually occurs at the end of your lease period, is when you opt to purchase your leased car rather than return it to the dealer. When you buy out your lease, you’ll pay the residual value of the car — its remaining value at the lease’s end — plus any applicable taxes and fees. Not all leases allow for a lease buyout, so read the terms and conditions of your lease and talk to the leasing company to determine your next steps.

Do you pay sales tax on a leased car buyout?

Depending on your state and lease terms, you may have already paid the required sales tax, but it’s possible the state you live in requires the tax to be rolled into your monthly payment. At the very least, you have likely already paid some sales tax on the car, so it’s highly unlikely you need to pay taxes on the complete original price of the leased car.

Most states roll the sales tax into the monthly payment of the car lease, though a few states require that all the sales tax for all your lease payments be paid upfront. In a some states, such as Texas, lessees must pay sales tax on the full value of the leased car versus just the tax on payments during the lease.

There are states that don’t charge sales tax, including:

• Alaska.
• Delaware.
• Montana.
• New Hampshire.
• Oregon.

How do you calculate the sales tax on a lease buyout?

Before you can calculate the sales tax on your lease buyout, you’ll need to calculate the car’s residual value. Your lease payments are determined in part by the difference between the car’s original value and residual.

The best way to calculate the sales tax on your lease buyout is to look at the original lease paperwork, where you can find a breakdown of the taxes.

From there, contact your state’s Department of Motor Vehicles or visit its website to learn how sales tax is calculated on leased cars in your state. You will then know what to expect for sales tax when you buy out your lease. If you’d prefer a more definite picture of how much you may be paying, you may want to consult a tax professional.

Example of sales tax on a lease buyout

As an example of how sales tax on a lease buyout works, imagine you’ve been leasing a car in a state with a sales tax rate of 7 percent. The car you leased was originally worth almost $50,000, but its residual value when the lease ends is $30,000.

If the lease took place in a state that applies sales tax to the residual value of a vehicle during a lease buyout, you would owe $2,100 in sales tax as part of the purchase. What happens next depends largely on the state you live in. You may be able to roll the sales tax into the new monthly payment on the car when you purchase your lease, but you could also be required to pay this tax upfront.

Once again, you’ll contact your state’s Department of Motor Vehicles or visit its website to find out the rules that apply where you live.

Can you avoid sales tax on a lease buyout?

There are limited ways to completely avoid sales tax on a lease buyout, but you may be able to minimize it. Consider these strategies to save money:

• Live in a state with no sales tax: Depending on your state of residence, you may not be required to pay sales tax on a lease buyout at all.
• Apply for a family transfer exemption: Some states may offer an exemption for sales tax on lease buyouts when the car’s ownership is transferred to an eligible family member.
• Trade in another vehicle: You may be able to reduce sales tax if you’re able to trade in another vehicle — and get trade-in credit — as part of the lease buyout agreement.

When should you consider a lease buyout?

There are multiple factors to consider as you decide if a lease buyout is worth it.

• The car has retained its value: Check if the car is worth at least as much as the payoff amount. If it’s not, that’s probably a good sign that a lease buyout is not a great option.
• The car is in good condition: If you exceed your mileage allowance or your car’s condition isn’t great, you may get hit with additional fees if you turn your car in. Depending on the amount you’ll be charged, a lease buyout may cut out a few costs.
• You like your car. If you’re happy with your vehicle, and you aren’t in the mood to change something that’s already working for you, a lease buyout can make sense.

Bottom line

Deciding whether to take out an auto loan to buy your leased car hinges on several factors. Knowing whether you have to pay sales tax — and how much — when you buy your leased car can help you decide if it makes sense for you. Laws vary by state, so check your lease paperwork and your state’s Department of Motor Vehicles for the regulations on sales tax where you live.

Remember, too, that you can turn in a leased car or do a buyout of your leased car at any franchised dealer that carries your brand. If you’re uncomfortable working with the dealer you originally leased the car through, simply take your business to another dealership.