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  #1  
Old 05-20-2013, 06:58 PM
jonathan20 jonathan20 is offline
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Tax advantage for lease with trade in

I have a remedial question concerning leasing.

I will be leasing a new BMW which is scheduled to arrive in a few weeks.

I own my current car which is worth more than the total cost of the new lease. In the state of Utah, if I trade my current car in as part of the lease deal I can save around $1500 in sale tax (plus a small amount of interest).

But in order to reap this tax reduction I will need to make an upfront single payment on the lease. In other words pay for everything up front.

I am new to leasing but its pretty clear that making the single upfront payment can be risky if the car is totaled or stolen early on in the lease. (I suspect that this does not happen that often to BMW's in Utah).

So which of the following two options is better


1. Take the trade-in and make a single lump sum payment on the new lease in order to reduce my tax burden by $1500 plus the small amount of interest.

3. Take the trade in, place all of the money in an interest bearing account to at least recover some of the interest, and put nothing down on the new lease. If I take this path I will lose the $1500 tax savings but mitigate the risk of a stolen vehicle.

I recognize that I might be able to sell the car on my own for at least $1500 more than what the dealer is offering me, however, I really would like to avoid the inconvenience.
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  #2  
Old 05-20-2013, 07:50 PM
lezam lezam is offline
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Quote:
Originally Posted by jonathan20 View Post
I have a remedial question concerning leasing.

I will be leasing a new BMW which is scheduled to arrive in a few weeks.

I own my current car which is worth more than the total cost of the new lease. In the state of Utah, if I trade my current car in as part of the lease deal I can save around $1500 in sale tax (plus a small amount of interest).

But in order to reap this tax reduction I will need to make an upfront single payment on the lease. In other words pay for everything up front.

I am new to leasing but its pretty clear that making the single upfront payment can be risky if the car is totaled or stolen early on in the lease. (I suspect that this does not happen that often to BMW's in Utah).

So which of the following two options is better


1. Take the trade-in and make a single lump sum payment on the new lease in order to reduce my tax burden by $1500 plus the small amount of interest.

3. Take the trade in, place all of the money in an interest bearing account to at least recover some of the interest, and put nothing down on the new lease. If I take this path I will lose the $1500 tax savings but mitigate the risk of a stolen vehicle.

I recognize that I might be able to sell the car on my own for at least $1500 more than what the dealer is offering me, however, I really would like to avoid the inconvenience.
Can you roll the $$ into MSD's?
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  #3  
Old 05-20-2013, 08:06 PM
jonathan20 jonathan20 is offline
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Good question

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Originally Posted by lezam View Post
Can you roll the $$ into MSD's?
That's a good question but it would only cover a fraction of the least cost.
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  #4  
Old 05-20-2013, 10:03 PM
Justin@NCBMW Justin@NCBMW is offline
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Tax advantage for lease with trade in

Quote:
Originally Posted by jonathan20 View Post
I have a remedial question concerning leasing.

I will be leasing a new BMW which is scheduled to arrive in a few weeks.

I own my current car which is worth more than the total cost of the new lease. In the state of Utah, if I trade my current car in as part of the lease deal I can save around $1500 in sale tax (plus a small amount of interest).

But in order to reap this tax reduction I will need to make an upfront single payment on the lease. In other words pay for everything up front.

I am new to leasing but its pretty clear that making the single upfront payment can be risky if the car is totaled or stolen early on in the lease. (I suspect that this does not happen that often to BMW's in Utah).

So which of the following two options is better


1. Take the trade-in and make a single lump sum payment on the new lease in order to reduce my tax burden by $1500 plus the small amount of interest.

3. Take the trade in, place all of the money in an interest bearing account to at least recover some of the interest, and put nothing down on the new lease. If I take this path I will lose the $1500 tax savings but mitigate the risk of a stolen vehicle.

I recognize that I might be able to sell the car on my own for at least $1500 more than what the dealer is offering me, however, I really would like to avoid the inconvenience.
No you don't lose your money with a one pay/pre pay lease. Where are you reading this from?




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  #5  
Old 05-21-2013, 06:04 AM
CTSoxFan CTSoxFan is offline
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+1 on Justin's comment.

When you buy a leased car, they calculate the total tax due on the depreciation and interest and divide this over the number of payments. If you trade in a financed/owned vehicle, they apply the reduction to the tax calc. For example, lets says your total Deprecation and interest is $18,000 on a 36 month term, so your payment is $500/month plus tax. Lets say your tax rate is 10% (just to make it easy). Your total tax would be $1800. and your total payment would be $550/month ($18,000+$1800)/36 = $550.

Now take that same example, but say you're trading in a car you own/financed worth $8000 (and putting any positive equity towards upfronts, maxing out MSDs and taking any left over as a check). Your total taxable amount would now only be $10,000, so your total tax is $1000 and your payment is $528/month ($18,000+$1,000)/36.

Hope this clears it up.
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Last edited by CTSoxFan; 05-21-2013 at 06:06 AM.
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  #6  
Old 05-21-2013, 07:54 AM
Haris335 Haris335 is offline
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Quote:
Originally Posted by CTSoxFan View Post
+1 on Justin's comment.

When you buy a leased car, they calculate the total tax due on the depreciation and interest and divide this over the number of payments. If you trade in a financed/owned vehicle, they apply the reduction to the tax calc. For example, lets says your total Deprecation and interest is $18,000 on a 36 month term, so your payment is $500/month plus tax. Lets say your tax rate is 10% (just to make it easy). Your total tax would be $1800. and your total payment would be $550/month ($18,000+$1800)/36 = $550.

Now take that same example, but say you're trading in a car you own/financed worth $8000 (and putting any positive equity towards upfronts, maxing out MSDs and taking any left over as a check). Your total taxable amount would now only be $10,000, so your total tax is $1000 and your payment is $528/month ($18,000+$1,000)/36.

Hope this clears it up.
Different states have different rules. Most state will not allow what you mentioned above. For example, NJ/NY will not let you deduct $8000 trade-in from your taxable amount. In NJ/NY trade-in will only help with tax on cash rebates or if you use part of your trade-in as a down payment.
However, states like Texas where lease sales tax is charged on the selling price of the car, trade-in will help reduce tax burden.
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  #7  
Old 05-21-2013, 07:55 AM
CTSoxFan CTSoxFan is offline
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Quote:
Originally Posted by Haris335 View Post
Different states have different rules. Most state will not allow what you mentioned above. For example, NJ/NY will not let you deduct $8000 trade-in from your taxable amount. In NJ/NY trade-in will only help with tax on cash rebates or if you use part of your trade-in as a down payment.
However, states like Texas where lease sales tax is charged on the selling price of the car, trade-in will help reduce tax burden.
You are correct, I should have prefaced it by saying this is what is done in my state (CT)
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  #8  
Old 05-21-2013, 04:08 PM
jonathan20 jonathan20 is offline
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Quote:
Originally Posted by CTSoxFan View Post
+1 on Justin's comment.

When you buy a leased car, they calculate the total tax due on the depreciation and interest and divide this over the number of payments. If you trade in a financed/owned vehicle, they apply the reduction to the tax calc. For example, lets says your total Deprecation and interest is $18,000 on a 36 month term, so your payment is $500/month plus tax. Lets say your tax rate is 10% (just to make it easy). Your total tax would be $1800. and your total payment would be $550/month ($18,000+$1800)/36 = $550.

Now take that same example, but say you're trading in a car you own/financed worth $8000 (and putting any positive equity towards upfronts, maxing out MSDs and taking any left over as a check). Your total taxable amount would now only be $10,000, so your total tax is $1000 and your payment is $528/month ($18,000+$1,000)/36.

Hope this clears it up.
What you stated was very clear. I was told that I could only reap this advantage in Utah if I paid for the entire lease up front in a single payment. So the issue for me seems to be does the tax savings of paying upfront outweigh the risk of paying for the entire lease up front in one single payment?
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  #9  
Old 05-21-2013, 04:13 PM
CTSoxFan CTSoxFan is offline
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Quote:
Originally Posted by jonathan20 View Post
What you stated was very clear. I was told that I could only reap this advantage in Utah if I paid for the entire lease up front in a single payment. So the issue for me seems to be does the tax savings of paying upfront outweigh the risk of paying for the entire lease up front in one single payment?
I wouldn't so much about the risk of the upfront payment but rather how much are you saving on taxes vs. what the opportunity cost of the money is that you will be laying out. I would look at what your return on the investment is and use that to make your decision.
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  #10  
Old 05-21-2013, 04:14 PM
Justin@NCBMW Justin@NCBMW is offline
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Quote:
Originally Posted by jonathan20 View Post
What you stated was very clear. I was told that I could only reap this advantage in Utah if I paid for the entire lease up front in a single payment. So the issue for me seems to be does the tax savings of paying upfront outweigh the risk of paying for the entire lease up front in one single payment?
What is the risk you speak of?
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  #11  
Old 05-21-2013, 05:52 PM
jonathan20 jonathan20 is offline
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Originally Posted by Justin@NCBMW View Post
What is the risk you speak of?

I know that the car will depreciate as soon as I drive it out of the dealership. If the car gets totaled or stolen (however unlikely that is) soon after I take delivery won't I assume the brunt of the depreciation when the insurance company makes the payment.
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  #12  
Old 05-21-2013, 06:27 PM
Justin@NCBMW Justin@NCBMW is offline
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Tax advantage for lease with trade in

Quote:
Originally Posted by jonathan20 View Post
I know that the car will depreciate as soon as I drive it out of the dealership. If the car gets totaled or stolen (however unlikely that is) soon after I take delivery won't I assume the brunt of the depreciation when the insurance company makes the payment.
Not for a one pay lease. In the event a total loss occurs... The unused monthly payments are refunded.

You are referring to a lease with a large cap reduction/down payment... Very different than a pre pay lease. MFs are not even the same as a SSP lease.


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  #13  
Old 05-21-2013, 06:33 PM
jonathan20 jonathan20 is offline
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Quote:
Originally Posted by Justin@NCBMW View Post
Not for a one pay lease. In the event a total loss occurs... The unused monthly payments are refunded.

You are referring to a lease with a large cap reduction/down payment... Very different than a pre pay lease. MFs are not even the same as a SSP lease.


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Interesting, I thought I needed to get have the cap reduction to avoid the sales tax. Do I have this wrong?

What is the difference in the MF's for a pre pay lease?
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  #14  
Old 05-21-2013, 07:13 PM
Justin@NCBMW Justin@NCBMW is offline
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Tax advantage for lease with trade in

Quote:
Originally Posted by jonathan20 View Post
Interesting, I thought I needed to get have the cap reduction to avoid the sales tax. Do I have this wrong?

What is the difference in the MF's for a pre pay lease?
I am not familiar with Utah tax guidelines so you will need to speak with your local dealer.

I am just bringing up an option available to you if you want to use all your equity in a lease.

Pre pay lease MFs are credit based so ask your dealer for the formula. There is however a .00080 rate reduction when calculating the MF


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  #15  
Old 05-23-2013, 04:56 AM
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mjsbmw mjsbmw is offline
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MSDs and prepay leases do not usually make sense. The amount of interest on prepay leases are significantly less so buying down the money factor does not give you the dramatic savings that you find with regular leases.
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Old 05-23-2013, 05:20 AM
CTSoxFan CTSoxFan is offline
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Originally Posted by mjsbmw View Post
MSDs and prepay leases do not usually make sense. The amount of interest on prepay leases are significantly less so buying down the money factor does not give you the dramatic savings that you find with regular leases.
Why do you say that? The interest amount is based on the total residual you are paying. Regardless of the base MF, if you buy down the money factor with MSDs the savings are the same whether you do a prepay or a traditional lease by my calculations.
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  #17  
Old 05-23-2013, 06:08 PM
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mclaren mclaren is offline
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You cannot use MSDs on a prepaid lease.
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Old 05-23-2013, 06:44 PM
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mclaren mclaren is offline
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Pre-paid or 1 pay leases usually don't make sense financially if you do MSDs on a regular lease. A 1 pay is calculated by subtracting .0008 from the non-subvented money factor, then calculating a regular lease payment and multiplying that payment by the number of months. The problem is BMW offers subvented money factors. Last fall the non-sub rate was .0018 and the sub rate was .0013. So a 1 pay mf was .001 but using max MSDs you could get .00081. So a regular lease was less without even taking into consideration the time value of money. If you put the lease payments in a .9% savings account and paid the lease out of that account using easy pay you would make some interest.
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